VN Standards on Auditing: Laws & Regs

Vietnam Standards on Auditing
Standard 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40.
Objective and general principles governing an audit of financial statements Audit contract
Quality control of auditing activities

Documentation
Fraud and error Considering the observance of laws and regulations in the audit of financial reports Planning Understanding of Business situation Audit Materiality Risk assessments and internal control Auditing evidences Additional audit evidences for special items and events First years auditing Fiscal year Starts Balance Analytical process Auditing sampling and other selective testing procedures Auditing of accounting estimates Events occurring after the date of closing accounting books and making financial statements Directors expositions Use of other auditors materials Considering the work of internal auditing
The auditor's report on financial statements Representation
Numb er 200 210 220 230 240 250 300 310 320 400 500 501 510 520 530 540 560 580 600 610 700 401 550 570 800 910 920 402 620 710 720 930 1000 260 330 505 545
Auditing in a computer information systems environment Related Parties Going concern The auditors report on special purpose audit engagements Engagements to review financial statements Engagements to perform agreed upon procedures regarding financial information Audit considerations relating to entities using service arganizations Using the work of an expert Comparatives Other information iin documents containing audited financial statements Engagement to compile financial information Audit of final accounts of investment Communication of audit matters with those charged with governance The auditors procedures in response to assessed risks External confirmation Auditing fair values measurements and disclosures
Standard No 250 Considering the observance of laws and regulations in the audit of financial reports
STANDARD No. 250 CONSIDERING THE OBSERVANCE OF LAWS AND REGULATIONS IN THE AUDIT OF FINANCIAL REPORTS GENERAL PROVISIONS 1. This standard aims to prescribe the basic principles and procedures and guide ways of applying the basic principles and procedures related to the auditors and auditing companies when considering the observance of laws and regulations by the audited units in the process of auditing the financial reports. 2. When drawing up plans and carrying out procedures for audit, when evaluating the results and making reports on audit, auditors and auditing companies must pay attention to the question that the nonobservance of laws and relevant regulations by audited units may greatly affect the financial reports, though in an audit of financial reports all acts of non-observance of laws and relevant regulations cannot be fully detected. 3. The assessment and determination of acts of non-observance of laws and regulations generally do not professionally rest with auditors and auditing companies. Where it must be determined whether acts of non-observance of laws and regulations greatly affect the financial reports or not, the auditors and auditing companies shall have to consult with the legal experts or concerned functional bodies. 4. The regulations and guidance on responsibilities of auditors and auditing companies in considering "frauds and errors" in an audit of financial reports are prescribed in another specific standard but not in this standard. 5. This standard shall apply to the audit of financial reports and also to the audit of other financial information as well as relevant services of auditing companies. This standard shall not apply to the audit of the observance, which is performed by auditing companies under separate contracts. Auditors and auditing companies must abide by the provisions of this standard when considering the observance of laws and regulations in the process of auditing the financial reports. The audited units and the parties using the auditing results must have necessary knowledge about the principles and procedures prescribed in this standard in order to fulfill their duties and coordinate with auditors and auditing companies in dealing with relations in the auditing process. Terms used in this standards are construed as follows: 6. Laws and regulations mean legal documents promulgated by competent bodies (the National Assembly, the National Assembly Standing Committee, the State President, the Government, the Prime Minister, the ministries and ministerial-level agencies, the agencies attached to the Government; joint documents of competent agencies, organizations, People?s Councils and People?s Committees of all levels and other agencies prescribed by law); documents issued by the superiors of professional societies, Management Boards and directors, which are not contrary to laws and related to production and business activities as well as economic and financial and accounting management belonging to the units? domains. 7. Non-observance means acts of wrongly implementing, omitting, inadequately and/or untimely implementing or not implementing laws and regulations, whether unintentionally or intentionally, by units. These acts committed by collectives, individuals in the names of units or the units? representatives. This standard does not mention acts of non-observance committed by collectives or individuals of units but not relating to the financial reports of units.
CONTENTS OF THE STANDARD The audited units? responsibility in the observance of laws and regulations 8. Directors (or the heads) of the audited units have the responsibility to ensure that their units strictly observe laws and current regulations; to prevent, detect and handle acts of non-observance of laws and regulations in their units. 9. The audited units must apply measures and procedures to prevent and detect acts of non-observance of laws and regulations, including: - Grasping in time the requirements of laws and regulations related to activities of units and applying measures to satisfy such requirements; - Establishing and operating an appropriate and efficient internal control system; - Elaborating and following the rules in business activities of units, applying measures for monitoring, timely commendation and discipline; - Using legal consultancy services, including financial and accounting consultancy services in order to properly meet the requirements of laws and regulations; - Organizing the internal audit sections suitable to the sizes and requirements of units; - Fully achieving legal documents and relevant regulations which the units have to abide by and documents related to cases of dispute, lawsuits. Auditors? scrutiny of the observance of laws and regulations 10. The audited units have the responsibility to observe laws and regulations. Through the audit of annual financial reports, the auditors and auditing companies shall help the audited units prevent and detect acts of non-observance of laws and regulations. 11. The risk which always confronts the audit is that it is very difficult to detect all errors that greatly affect the financial reports, even when the audit has been carefully mapped out and carried out in strict accordance with the auditing standards. The causes of the auditing risk include: - The units? internal control systems and accounting systems fail to fully satisfy the requirements of the legal documents and regulations related to their operations and financial reports; - The internal control systems and accounting systems are handicapped with potential limitations in preventing and detecting errors and violations, particularly errors and violations committed as the result of non-observance of laws and regulations; - Auditors use the sampling method; - The auditing evidences are often characterized more by judging and convincing than sure confirmation; - Units may deliberately cover their acts of violation (Example: collusion, cover-up, forgery of documents, deliberately making wrong accounting?) or deliberately supply false information to auditors. 12. When drawing up plans for and performing the audit, auditors and auditing companies must take professionally cautious attitude (as provided for in Vietnamese audit standard No. 200), and must pay
attention to acts of non-observance of laws and regulations, thus leading to errors which greatly affect the financial reports. When detecting an act of intentional non-observance of laws and regulations, auditors shall have to take into account the possibility of other violations committed by such unit. On the contrary, if such act is unintentional, the auditors must not necessarily apply the above caution. 13. Where the law or an auditing contract requires the report on the observance of given provisions of law, auditors and auditing companies shall have to draw up plans for inspection of the observance of such provisions by the audited units. 14. In order to draw up auditing plants, auditors must have the general knowledge of law and regulations related to the business activities and lines of the audited units; must thoroughly grasp the units? ways and measures to implement laws and regulations. Auditors shall have to pay attention to the regulations the violation of which will greatly affect the financial reports, or affect the audited units? capability for constant operation. 15. In order to obtain the overall understanding of laws and regulations related to the audited units, the auditors shall apply the following measures: - Using the available knowledge related to business activities and lines of units; - Requesting units to provide and explain their internal regulations and procedures related to the observance of laws and regulations; - Exchanging opinions with units? leadership on the laws and regulations which greatly affect the financial reports of units; - Scrutinizing the units? specific regulations on and procedures for the settlement of disputes upon their occurrence or sanctions; - Discussing with relevant functional bodies, law consultants and other individuals for further understanding of laws and regulations related to the units? activities. 16. Basing themselves on the overall understanding of laws and regulations related to activities of audited units, the auditors and auditing companies shall have to proceed with necessary procedures for determining acts of non-observance of laws and regulations related to the process of elaborating financial reports, paying special attention to the following procedures: - Exchanging ideas with directors (or heads) of the audited units on the observance of laws and regulations; - Consulting with relevant functional bodies. 17. Auditors shall have to gather all appropriate auditing evidences on the non-observance of laws and regulations by units, thus greatly affecting the financial reports. Auditors must have adequate understanding of laws and regulations with a view to considering the observance of laws and regulations when auditing databases related to information on the financial reports. 18. When legal documents and regulations related to units? business activities and lines see changes in each period, the auditors and auditing companies shall have to examine the observance of these regulations in their proper temporal relations with the elaboration of the financial reports.
19. Apart from the principles and procedures already mentioned in paragraphs 16, 17 and 18, the auditors and auditing companies need not carry out other procedures for inspecting the observance of laws and regulations by units if those procedures fall outside the scope of auditing the financial reports. 20. The carrying out of procedures for auditing financial reports will help auditors and auditing companies detect acts of non-observance of laws and regulations. 21. Auditors shall have to gather the directors? written expositions and the units? documents related to acts of non-observance of laws and regulations which have actually occurred or may occur and affect the truthfulness and logic of the financial reports. 22. After carrying out the examination procedures as required by this standard, if being unable to gather evidences on acts of non-observance of laws and regulations, the auditors may regard the units as having observed laws and regulations. Procedures which must be carried out upon the detection of acts of non-observance of laws and regulations 23. Auditors must always attach importance to clues leading to acts of non-observance of law and regulations by units. A number of these clues are mentioned in Appendix No.1. 24. When detecting information related to acts of non-observance of laws and regulations, the auditors and auditing companies must inquire into the nature of such acts, the circumstance in which such acts are committed and the relevant information for the assessment of possible impacts on the financial reports. 25. When deeming that acts of non-observance of laws and regulations have affected the financial reports, the auditors shall have to take into account: - The possible financial consequences, even risks, which force the audited units to cease their operation; - The necessity to explain the financial consequences in the section on explanation of financial reports; - The degree of effect on the truthfulness and logic of the financial reports. 26. When having any doubts about or detecting acts of non-observance of laws and regulations, the auditors shall have to note down and keep in auditing dossiers such detection and discuss with the directors (or heads) of the audited units. Such a dossier shall include the extract of accounting vouchers and books, minutes of meetings and other relevant documents. 27. Where directors (or heads) of the units fail to adequately supply information proving that their units have strictly observed laws and regulations, the auditors and auditing companies should discuss and consult with legal experts or concerned functional bodies about acts of suspected non-observance of laws, thus affecting the financial reports. These discussions and exchanges shall help auditors and auditing companies further understand the consequences and measures to be further implemented. 28. Where it is unable to gather adequate information in order to do away with doubts about acts of nonobservance of laws and regulations, the auditors and auditing companies must examine the impact of the lack of evidences and present such in the auditing report. 29. Auditors and auditing companies shall have to analyze the consequences of the non-observance of laws and regulations related to auditing work, particularly on the reliability of the expositions of the directors. Auditors shall have to re-evaluate the risks and re-examine the directors? expositions in the following cases where:
- The internal control system fail to detect and fail to prevent acts of non-observance; - Acts of non-observance have not been mentioned in the expositions, particularly acts which the units have deliberately concealed. Notification on acts of non-observance of laws and regulations. Notification to directors (or heads) of the audited units. 30. In the course of audit, the auditors shall have to notify the directors (or the heads) of the units of the acts of non-observance of laws and regulations, which have been detected by the auditors. The auditors are allowed not to notify non-observance acts if they are determined as not having caused considerable consequences, except otherwise agreed upon by the auditors and the units. 31. If auditors and auditing companies determine that acts of non-observance of laws and regulations are intentionally committed and greatly affect the financial reports, they must immediately notify their findings in writing to the directors (or the heads) of the units. 32. If auditors and auditing companies detect that directors (or heads) of units are involved in acts of nonobservance of laws and regulations, thus greatly affecting the financial reports, they must consult with legal experts and report such to the superior authorities of the audited units. Notification to the auditing report users of the financial reports. 33. If auditors conclude that acts of non-observance of laws and regulations have greatly affected the financial reports but not been correctly reflected in the financial reports though the auditors have requested the amendments and adjustments, such auditors shall have to state their opinions of partial acceptance or non-acceptance. 34. If units fail to create conditions for auditors to adequately gathers appropriate auditing evidences for the assessment of acts of non-observance of laws and regulations, which greatly affect the financial reports, the auditors shall have to give their opinions of partial acceptance or their refusal to give opinions as they have been restricted in auditing scope. 35. If being unable to gather adequate evidences on acts of non-observance of laws and regulations, which have occurred, auditors must examine their impacts on the financial reports. Notification to concerned functional bodies. 36. Auditors and auditing companies have the responsibility to keep confidential the customers? information and data. Yet, if audited units have committed acts of non-observance of laws and regulations, depending on the legal requirements, the auditors and auditing companies must notify such acts to concerned functional bodies. For this case, the auditors are allowed to make prior consultation with legal experts. Auditors and auditing companies withdraw from auditing contracts. 37. When deeming that the audited units fail to take necessary measures to handle acts or signs of nonobservance of laws and regulations, including acts which do not greatly affect the financial reports, the auditing companies are allowed to terminate the auditing contracts. The auditing companies shall have to carefully consider and consult with legal experts before making such decisions.
38. When substitute auditors request the incumbent auditors to supply information on customers, the latter have the responsibility: - If allowed by customers to discuss about their work, to supply the substitute auditors with information on acts of non-observance of laws and regulations, the reasons for termination of contracts as well as their recommendations on whether to refuse or accept the contracts. - If not allowed by customers to discuss about their work, to notify such disallowance to the substitute auditors./. Appendix No. 1 MAIN CLUES TO ACTS OF NON-OBSERVANCE OF LAWS AND REGULATIONS - Examination, inspection and investigation were already conducted by concerned functional bodies regarding the violations of laws and regulations such as borrowing and lending, payment relations, fines,...; - Payments were made without clear reasons or loans were provided to people with positions, powers; - Payments for services were too high as compared to other enterprises of the same branches or to the actual value of the provided services themselves; - Purchase/ sale prices are too high or too low as compared to market prices; - Enterprises have maintained unusual ties with companies which have had many special rights, favorable business or companies which have been suspected of meeting with problems; - Payment has been made to a country other than the country which has produced or supplied such goods, services; - Having no valid and proper purchase/ sale vouchers upon the payment; - Failing to strictly and fully observe the prescribed accounting regimes; - Revenue and expenditure operations have not been approved or the operation of recording has been conducted in contravention of regulations; - The units have already been denounced or ill-rumored by mass media or people; - The enterprises? production and/or business results have not been stable, their business result reports have seen constant changes; - The expenses for management and advertisements have been too high; - The appointment of chief accountants has been made in contravention of regulations; - The inventory regime has been implemented in contravention of regulation.
Standard No 310 Understanding of business situation
STANDARD No. 310 UNDERSTANDING OF BUSINESS SITUATION (Issued together with the Finance Minister?s Decision No. 219/2000/QD-BTC of December 29, 2000) GENERAL PROVISIONS 1. This standard aims to prescribe the basic principles and procedures and guide ways of applying the basic principles and procedures in order to inquire into the business situation and the use of such knowledge in the process of auditing the financial reports. 2. To perform the auditing of financial reports, the auditors must have necessary and adequate understanding of the business situation in order to be able to assess and analyze events, operations and practical activities of the audited units, which, according to the auditors, greatly affect the financial reports, the inspection by auditors or the auditing reports. Example: Auditors use their knowledge of business situation to determine potential risks as well as controlled risks and determine the contents, order and scope of auditing procedures. 3. The auditors? knowledge needed for performing an audit shall include their overall knowledge of the economy, the units? operation spheres, more specific knowledge of organization and operation of the audited units. The auditors? knowledge of the units must not necessary up to the level of the directorate of the audited units. The specific contents of matters to be understood when auditing the financial reports are presented in Appendix No.1. The auditors may add contents to this list and may not apply this entire list to a specific audit. 4. This standard shall apply to the audit of financial reports and also to the audit of other financial information as well as relevant services of the auditing companies. The auditors and auditing companies must abide by the provisions of this standard in the process of auditing financial reports. CONTENTS OF THE STANDARD Information gathering 5. Before accepting the auditing contracts, auditors and auditing companies shall have to gather preliminary information on the operation spheres, enterprise type, ownership form, production technologies, management apparatus organization and practical operation of the units, thereby evaluating the possibility of gathering necessary information (knowledge) about business situation in order to carry out the auditing work. 6. After accepting the auditing contracts, the auditors shall have to gather necessary detailed information right from the time the auditing work starts. In the course of audit, the auditors shall have to always examine, evaluate, update and supplement new information. 7. The gathering of necessary information on units? business situation is a process of continuous accumulation, including the gathering, evaluation and comparison of the gathered information with the auditing evidences at all stages of the auditing process. Example: Information gathered at the stage of plan
elaboration must still be continuously updated and further supplemented at the subsequent stages so that the auditors fully understand the units? activities. 8. For auditing contracts of the subsequent year, the auditors shall have to update and re-evaluate the information gathered previously, particularly the information in the auditing dossiers of the previous years. The auditors shall have to pay attention to the existing problems detected in the previous year and complete all procedures with a view to detecting considerable changes which have arisen after the previous audit. 9. The auditors gather information on business situation from the following sources: - The practical experiences about the units and the business lines of the audited units in the sum-up reports, working minutes, the press; - The previous year?s auditing dossiers; - The consultation with the directors, chief accountants or officials as well as employees of the audited units; - The consultation with the internal auditors and the examination of internal audit reports of the audited units; - The consultation with other auditors and consultants who have provided services for the audited units or work in the same fields with the audited units; - The consultation with experts, outside subjects, who are knowledgeable about the audited units (Example: economic experts, superior bodies, customers, suppliers, competition rivals?); - The consultation of publications relating to the audited units? operation domains (Example: Statistical figures of the Government, specialized press, banks? information, securities market?s information?); - The legal documents and regulations which affect the audited units; - Field surveys of the offices, workshops of the audited units; - The documents supplied by the audited units (Example: Resolutions and minutes of meetings, materials sent to shareholders or superior bodies, internal management reports, periodical financial reports, policies on economic management, finance, tax, accounting system, internal control documents, regulations on powers, functions and tasks of each section in the units?). Use of knowledge 10. The knowledge of business situation constitutes an important basis for the auditors to make professional assessments. The level of business situation knowledge and the rational use of such knowledge will help the auditors in the following job: - Assessing risks and determining noteworthy issues; - Drawing up plans and conducting the auditing work efficiently; - Assessing the auditing evidences; - Providing better services for the audited units.
11. In the auditing process, understanding the business situation is very important, which helps the auditors assess the following specific aspects: - Evaluation of possible risks and controlled risks; - Analysis of business risks and handling options of the directors (or the heads); - Elaboration of auditing plans and programs; - Determination of the importance and evaluation of its compatibility in the auditing process; - Evaluation of the adequacy and appropriateness of the auditing evidences; - Evaluation of accounting estimates and expositions of the directors; - Determination of areas which require special attention in auditing and necessary auditing skills; - Determination of concerned parties and operations arising among the concerned parties; - Determination of contradicting information; - Determination of unusual circumstances (Example: Fraudulence or non-observance of laws and regulations; statistical figures contradicting the figures of financial reports?); - Making questionnaires and evaluation of the reasonability of the answers; - Consideration of the compatibility of the accounting regime, information presented on the financial reports. 12. Audit assistants who are employed by auditors and auditing companies and assigned to perform auditing work must have certain knowledge of the business situation so as to perform their work. Besides, the assistants must gather supplementary information to meet the requirements of their work and exchange such information with other members of their groups. 13 In order to effectively use the knowledge of business situation, the auditors shall have to evaluate and examine the overall impacts of their knowledge on the units? financial reports as well as the consistency of the data in the financial reports as compared with the auditors? knowledge of the business situation./. Appendix No. 1 THE SPECIFIC CONTENTS OF AUDITORS? KNOWLEDGE ABOUT THE AUDITED UNITS? BUSINESS SITUATION A. GENERAL KNOWLEDGE OF THE ECONOMY - The real situation of the economy (Example: Economic recession, growth,?); - Interest rates and financial capability of the economy; - The inflation rate and currency unit value; - The Government?s policies:
+ Monetary and banking policies (Example: Interest rates, exchange rates, credit limits,?); + Financial policies; + Tax policies (Example: value added tax, import and export tax; enterprise income tax,?); + Investment promotion policies (Example: The Government?s support programs,?); - Fluctuation of the securities market and the ratios to secure safety in business activities of the audited units; - Control of foreign exchange and exchange rates. B. ENVIRONMENT AND FIELDS OF OPERATIONS OF THE AUDITED UNITS - Requirements on the environment and relevant matters; - Market and competition; - Characters of business operation (constant or seasonal); - Changes in production technology and business; - Business risks (Example: High technologies, market?s tastes, competition,?); - Shrinkage or expansion of business scale; - Unfavorable conditions (Example: Rise or fall of supply and demand, war, prices,?); - Important rates and statistical figures on annual business activities; - Accounting standards, regimes and relevant matters; - Relevant law provisions and policies as well as specific regimes; - Sources of supply (Example: Commodities, services, labor,?) and prices thereof. C. INTERNAL FACTORS OF THE AUDITED UNITS 1. Important ownership and management characters - The Management Board: + The number of its members and composition; + The prestige and experience of each individuals; + The independence from the director and the control of the director?s activities; + Periodical meetings; + The existence and operation scope of the Control Board;
10
+ The existence and effect of the regulation on the unit?s operation; + Changes in professional advisers (if any). - The director (or the head) and the executive apparatus: + Personnel change (Example: the director, deputy-director, chief accountant,?); + Experience and prestige; + Income; + Key finance officials and their positions in the unit; + Chief accountant and accounting personnel; + Regimes of material incentives, commendation, discipline; + Using accounting drafts and estimates; + Assignment of powers and responsibilities in the executive apparatus; + Pressure on the director (or the head); + Management information systems. - Type of enterprise (Example: State-run, collective, private, equitized, limited liability, foreign-invested? enterprises); - Permitted business fields, scope and subjects; - Permitted operation duration; - Capital owners and concerned parties (Example: Domestic, foreign, prestige and experience,?); - Capital structure (recent or anticipated changes,?); - Chart on organization of production and business apparatus; - Operation scope; - Principal production and/or business establishment and branches, agents; - Chart on organization of the managerial apparatus; - Management targets and strategic plans; - Shrinkage or expansion of business operation (already planned or recently implemented); - Financial sources and measures; - Function and operational quality of the internal audit section (if any);
11
- The director?s views on and attitude toward the internal control system; - The auditing companies and auditors in the previous years. 2. The units? business situation (Products, markets, suppliers, expenditure, professional activities) - Characters and scale of production and/or business operation; - Production conditions, warehouses and storing yards, offices; - Issues concerning human resources (Example: Labor quantity and quality, human resource distribution, supply sources, wage levels, employee regulation, collective labor contract and trade union, the implementation of the retirement regime and the Government?s regulations on labor,?); - Products, services and markets (Example: Customers and principal contracts, terms on payments, rates of accumulative profits, percentage of dominant markets, competitive rivals, export, pricing policies, fame of goods articles, warranty, goods order, marketing trends, strategy and targets, production process,?); - Key goods and service suppliers (Example: long-term contracts, the stability of suppliers, payment terms, forms of import, forms of supply,?); - Goods in stock (Example: Location, quantity, quality, specifications,?); - Commercial advantages, the right to use labels, invention patents?; - Important expenses; - Research and development; - Assets, debts, operations in foreign currencies and foreign exchange risk insurance operations; - Laws and regulations which greatly affect the audited units; - Management information systems (present status, anticipated changes,?); - Loan debt structure, terms on debt narrowing and restriction. 3. Financial capability (Factors relating to the financial situation and profit-generating capability of the audited units). - Important rates and statistical data on business operation; - Trends of fluctuation of the financial results. 4. Environment for making reports (Objective impacts on the units? directors (or heads) in making the financial reports. 5. Legal factors - Legal environment and provisions; - Financial policies and tax policies; - Requirements on the auditing reports; - Users of financial reports.
12
Standard No 500- Auditing evidences
STANDARD No. 500 AUDITING EVIDENCES (Issued together with the Finance Minister?s Decision No. 219/2000/QD-BTC of December 29, 2000) GENERAL PROVISIONS 1. This standard aims to prescribe the basic principles and procedures and guide the ways of applying the basic principles and procedures to the quantity and quality of auditing evidences to be gathered when auditing financial reports. 2. The auditors and auditing companies shall have to adequately gather the appropriate auditing evidences for use as basis to state their opinions on the financial reports of the audited units. 3. This standard shall apply to the audit of financial reports and also to the audit of other financial information and relevant services of the auditing companies. The auditors and auditing companies shall have to abide by the provisions of this standard in the process of gathering and processing the auditing evidences. The audited units (customers) and the parties using the auditing results must have necessary knowledge of this standard for coordination in work and the handling of relations related to the process of supplying and gathering the auditing evidences. 4. The auditing evidences shall be gathered through the proper combination between controlled experiment and basic experiment procedures. In a number of cases, the auditing evidences can only be gathered through basic experiments. Terms used in this standard shall be understood as follows: 5. Auditing evidences mean all materials and information gathered by auditors and related to the audit and on the basis of such information the auditors shall formulate their opinions. The auditing evidences include accounting materials, vouchers and books, the financial reports and materials and information from other sources. 6. Controlled experiment (inspection of control system) means the inspection conducted to gather auditing evidences on the conformability and efficient operation of the accounting system and the internal control system. 7. Basic experiment (basic inspection) means the inspection conducted to gather auditing evidences related to financial reports, aiming to detect key errors which affect the financial reports. "Basic experiments" shall include: a/ Detailed inspection of operations and balances; b/ Analytical process. CONTENTS OF THE STANDARD Adequate and appropriate auditing evidences
13
8. The auditors shall have to adequately gather the appropriate auditing evidences for each kind of their opinion. The "adequacy" and "appropriateness" must always go hand in glove and shall apply to the auditing evidences gathered from controlled experiments and basic experiments. "Adequacy" is the criteria indicating the quantity of auditing evidences. "Appropriateness" is the criteria indicating the quality and reliability of the auditing evidences. Usually, the auditors shall base themselves more on the evidences of critical and persuasive character than on evidences of affirmative character. The auditing evidences are often gathered from various sources and in various forms, serving as basis for the same database. 9. In the course of formulating their opinions, the auditors must not necessarily check all available information. The auditors may make conclusions on the account balances, economic operations or internal control systems on the basis of sampling inspection by the statistical method or personal judgment. 10. The auditors? assessment of the adequacy and appropriateness of the auditing evidences largely depends on: . The nature, content and extent of the potential risks of the whole financial report, of each account balance or each type of operation; . The accounting system, the internal control system and the evaluation of controlled risks; . The importance of the inspected clauses and items; . Experiences from previous inspections; . Results of auditing procedures, including detected errors or frauds; . The sources and reliability of materials and information. 11. When gathering auditing evidences from controlled experiments, the auditors shall have to examine the adequacy and appropriateness of the auditing evidences which serve as basis for their assessment of controlled risks. 12. Auditors should gather auditing evidences from the accounting system and the internal control system in terms of: Designing: The accounting system and the internal control system are designed in a way so as to be able to ward off, detect and correct key errors; Implementation: The accounting system and the internal control system exist and operate efficiently throughout the period of examination. 13. When gathering auditing evidences from basic experiments, the auditors shall have to examine the adequacy and appropriateness of the evidences gathered from basic experiments together with evidences gathered from controlled experiments with a view to confirming the database of the financial reports. 14. Database of financial reports means the basis of clauses, items and information presented in the financial reports, which the directors (of the heads) of the units have the responsibility to elaborate on the basis of the prescribed standards and accounting regimes, which must be expressed clearly or with grounds for each index in the financial reports. The database of a financial report must meet the following criteria:
14
a/ Tangibility: An asset or a debt reflected in the unit?s financial report must actually exist (availability) at the time of making the report; b/ Rights and duties: An asset or a debt reflected in the unit?s financial report must have the ownership right or liability to return at the time of making the report; c/ Occurrence: An operation or an event, which is already recorded, must occur and relate to the unit during the period of examination; d/ Adequacy: All assets, debts, operations or transactions, which have occurred and related to financial reports must be reported fully with all relevant events; e/ Assessment: An asset or a debt is recorded according to appropriate value on the basis of existing standards and accounting regimes (or acknowledged); f/ Accuracy: An operation or an event is inscribed strictly according to its value, turnover or expenditures are acknowledged according to prescribed periods, correct clauses and items and mathematically correct. g/ Presentation and announcement: Clauses and items are classified, expressed and announced in conformity with the existing accounting standards and regime (or accepted). 15. The auditing evidences must be gathered for each database of a financial report. Evidences related to a database (such as the actual existence of goods in stock) can not make up for the lack of evidences related to other databases (such as the value of such stocked goods). The content, order and scope of basic experiments vary according to each database. Experiments may supply auditing evidences for various databases at a time (like the recovery of collectible amounts may supply evidences for the actual existence and value of such collectible amounts). 16. The reliability of auditing evidences depends on their sources (inside or outside), forms (image, documents or voices) and each specific case. The evaluation of the reliability of auditing evidences rely on the following principles: . Evidences originating from outside the units are more reliable than evidences originating from the inside; . Evidences originating from inside the units shall be more reliable when the accounting system and the internal control system operate efficiently; . Evidences gathered by auditors themselves are more reliable than evidences supplied by units; . Evidences in forms of documents and images are more reliable than evidences recorded verbally. 17. Auditing evidences shall be more convincing when they are confirmed by information from various sources and in various forms. In this case, the auditors may have higher reliability for auditing evidences than cases where information are obtained from separate evidences. On the contrary, where the evidences from this source contradict with evidences from other sources, the auditors shall have to determine procedures for necessary supplementary inspection to solve the above-said contradiction. 18. In the auditing process, the auditors must take into account the relationship between the expenses for the gathering of auditing evidences and the profits gained from such information. Arising difficulties and expenses for gathering evidences must not be the reasons for ignoring a number of necessary inspection procedures.
15
19. When having doubts about databases which may greatly affect the financial reports, the auditors shall have to gather more auditing evidences to get rid of such doubts. If unable to adequately gather appropriate evidences, the auditors shall have to give their opinions of whether to accept them partially or not to give any comments. Methods of gathering auditing evidences 20. The auditors shall gather auditing evidences by the following methods: examination, observation, investigation, certification, calculation and analytical process. The application of these methods depends partially on the time of gathering auditing evidences. 21. Examination: means the scrutiny of accounting vouchers and books, financial reports and relevant documents or the inspection of tangible assets. The above-said examination supply evidences of high or low reliability depending on the contents and sources of the evidences and on the effectiveness of the internal control system for the process of treating such documents. Four following major sources of documents shall supply the auditors with evidences of varied reliability: . Documents compiled and kept by the third party; . Documents compiled by the third party and kept by the audited units; . Documents compiled by the audited units and kept by the third party; . Documents compiled and kept by the audited units. The inspection of tangible assets shall supply reliable evidences on the actual existence of the assets, which are, however, not necessary the reliable evidences on the ownership and value of such assets. 22. Observation: means the monitoring of a phenomenon, a process or a procedure performed by other people (Example: Auditors observe the actual inventory or the control procedures carried out by units?). 23. Investigation: means the search for information from knowledgeable people inside and outside the units. The investigation carried out by officially sending documents, interviews or exchanges of investigation results will supply auditors with information not yet available, or supplementary information for the consolidation of already obtained evidences. 24. Certification: means the reply to a request for the supply of information aiming to verify again the information already available in the accounting documents (Example: Auditors request the units to send letters to customers for direct verification of the balances of collectible amounts of the customers?). 25. Calculation: means the examination of mathematical accuracy of data in the accounting vouchers and books, financial reports and other relevant documents or the independent calculation by auditors. 26. Analytical process: means the analysis of data, information and important rates thereby to find out trends and fluctuations and to find out relations contradicting with other relevant information or the big disparity with the anticipated value./.
16
Standard No 510- First years auditing- Fiscal year- Starts balance
STANDARD No. 510 FIRST YEAR?S AUDITING- FISCAL YEAR-START?S BALANCE (Issued together with the Finance Minister?s Decision No. 219/2000/QD-BTC of December 29, 2000) GENERAL PROVISIONS 1. This standard aims to prescribe the basic principles and procedures and guide the ways of applying the basic principles and procedures, which are related to the fiscal year- start?s balance when examining the financial report of the first year. This standard also requires the auditors to know uncertain events or existing commitments at the time of the beginning of the fiscal year in case of auditing the financial report of the first year. 2. When auditing the first year?s financial report, the auditors shall have to adequately gather appropriate auditing evidences in order to ensure that: a) The year-start?s balance contains no errors which greatly affect the current year?s financial report; b) The year-end balance of the previous fiscal year is accurately carried forward or properly re-classified in case of necessity; c) The accounting regime has been consistently applied or the changes in the accounting regime have been adjusted in the financial reports and fully presented in the explanation of the financial report. 3. This standard shall apply to auditing the financial report of the first year and also to the first-year auditing of other financial information. The auditors and auditing companies must abide by the provisions of this standard in the process of auditing the first year?s financial report. The audited units (customers) and the parties using the auditing results must have necessary knowledge of the provisions of this standard for coordination in work with the auditing companies and auditors as well as in handling relations related to the first year?s audited financial report. Terms used in this standard shall be understood as follows: 4. The year-start balance: means the balance of the book-keeping account at the time of the beginning of the fiscal year. The year-start balance is elaborated on the basis of the balance at the end of the previous fiscal year. The year-start balance is subject to the impact of: a/ Economic events and operations in the previous years; b/ The accounting regimes applied in the previous year. 5. The first year: means the year of auditing when the financial report of the previous year: - Has not yet been audited; or - Has been audited by other auditing companies.
17
CONTENTS OF THE STANDARD The auditing procedures 6. The adequacy and appropriateness of the to be-gathered auditing evidences on the year-start balances depend on: - The accounting regime applied by units; - The previous year?s financial report either audited or not yet audited and the content of the previous year?s auditing report (if already audited); - The content and nature of accounts and risks with major errors affecting the current year?s financial report; - The importance of the year-start balance relating to the current year?s financial report. 7. The auditors must examine the year-start balances already reflected according to the accounting regime applied in the previous year and applied consistently in the current year. If there are changes in the accounting regime, the auditors shall have to examine such changes as well as the implementation and presentation thereof in the current year?s financial report. 8. When the previous year?s financial report is audited by another auditing company, the auditors of the current year may gather the auditing evidences on the year-start balance by way of examining the auditing files of the auditors of the previous year. In this case, the current year?s auditors should pay attention to the professional capability and independence of the previous year?s auditors. If the auditing report of the previous year?s auditors has not fully accepted the financial report, the current year?s auditors must pay attention to the reasons for non-total acceptance by the previous year?s auditors. 9. When the previous year?s financial report has not yet been audited or has already been audited but failed to satisfy the current year?s auditors, after filling in the procedures prescribed in Paragraph 08 but failing to adequately gather appropriate auditing evidences, the auditors shall have to carry out the auditing procedures specified in Paragraph 10 and Paragraph 11. 10. For the year-start balances regarding the short-term debts and working assets, auditors may gather auditing evidences when carrying out the current year?s auditing procedures. + Example 1: "When examining the settlement of collectible and payable amounts in the current year, the auditors shall be able to gather the auditing evidences on the year-start balances of collectible and payable amounts". + Example 2: "For goods in stock at the beginning of the year, the auditors shall have to carry out additional auditing procedures by way of supervising the actual inventory in the year or at the year-end, comparing the quantity, import and export value from the year-start to the time of actual inventory and find out the year-start?s goods in stock". + Example 3: "For bank deposit credit balance, collectible and payable amounts, the procedure for certification of the year-start balance by the third person may be carried out". The combination of these auditing procedures will provide auditors fully with appropriate auditing evidences. 11. For fixed assets, investment amounts and long-term debts, the auditors shall have to examine the vouchers proving the year-start balances. In a number of certain cases, for investment amounts and long-
18
term debts, the auditors may get the certification of the year-start balances from the third party or carry out additional auditing procedures. Conclusion and making of auditing reports 12. After carrying out the above-mentioned auditing procedures, if the auditors are still unable to adequately gather appropriate auditing evidences on the year-start balances, the report on the auditing of the first year?s financial report shall be made according to one of the following types: a/ The auditing report of type "Opinion of partial acceptance" (or "Exclusion opinion") Example 1: "?We could not supervise the actual inventory of goods in stock on December 31, X1, as by that time we had not been appointed auditors. The additional auditing procedures also do not permit us to examine the truthfulness of the volume of goods in stock by above-said time. To us, excluding impacts (if any) on the financial report for the above-said reasons, the financial report has reflected truthfully and reasonably the key aspects of the financial situation of the company by the time of December 31, X2 as well as the business results and sources of currency flow in the fiscal year ending on December 12, X2, in conformity with the current Vietnamese standards and accounting regimes and relevant law provisions". b/ The auditing report of type "Opinion of refusal" (or "Opinion of being unable to give opinions") Example 2: "?We could not supervise the actual inventory of goods in stock on December 31, X1, as by that time we had not been appointed auditors. Due to the unit?s limitation we could not examine the goods in stock at the beginning of the year with the value of VND XX as well as we did not receive the certifications of debts to be recovered at the beginning of the year with the value of VND XY on the accounting balance sheet on December 31, X1. To us, because of the importance of these events, we refuse to give our opinions (or cannot give our opinions) on the unit?s financial report ending on December 31, X2". 13. Where the year-start balance contains many errors which greatly affect the current year?s financial report, the auditors shall have to notify such to the director (or the head) of the unit and, after getting the consent of the director, to the previous year?s auditors (if any). Where the year-start balance contains many errors which greatly affect the current year?s financial report as mentioned above, but the audited unit has failed to treat and present them in the financial report, the auditors shall give the "Opinion of partial acceptance" or "Opinion of non-acceptance". 14. Where the current year?s accounting regime sees changes as compared with the previous year?s accounting regime and such changes have not been handled and fully presented in the explanation of the financial report, the auditor shall give the "Opinion of partial acceptance" or "Opinion of non-acceptance". 15. Where the previous year?s auditing report fails to give the " Opinion of total acceptance", the auditor shall have to examine the reasons therefor and its impact on the current year?s financial report. Example, due to the auditing scope limit or the inability to determine the year-start balance of goods in stock but such does not greatly affect the current year?s financial report, the auditor may give the opinion of total acceptance. If the reasons for non-total acceptance of the previous year?s financial report remain and greatly affect the current year?s financial report, the auditor shall have to give proper opinion in the current year?s auditing report./.
19
Standard No 520- Analytical process
STANDARD No. 520 ANALYTICAL PROCESS (Promulgated together with the Finance Minister?s Decision No. 219/2000/QD-BTC of December 29, 2000) GENERAL PROVISIONS 1. This standard aims to prescribe the basic principles and procedures and guide the ways of applying the basic principles and procedures related to the analytical process (procedures) in the course of auditing the financial reports. 2. The auditors must carry out the analytical process when making the auditing plans and the overall examination of the audit. The analytical process is also carried out at other stages of the auditing process. 3. This standard shall apply to the audit of financial reports and also to the audit of other financial information and relevant services of the auditing companies. The auditors and auditing companies must abide by the provisions of this standard in the course of performing the audit and providing relevant services. The audited units (customers) must have necessary knowledge of this standard for coordination with auditors in supplying necessary information and documents related to the audit. Terms used in this standard shall be understood as follows: 4. Analytical process: means the analysis of data, information and important rates, in order through which, to find out trends and fluctuations as well as relations, which contradict other relevant information or see great disparity with the anticipated value. CONTENTS OF THE STANDARD Contents and purposes of the analytical process 5. The analytical process covers the comparison of financial information, such as: - Comparing corresponding information in the period with those of the previous periods; - Comparing reality with the unit?s plan (Example: Production plan, sales plan?); - Comparing reality with the auditor?s estimates (Example: Estimated depreciation expense?); - Comparing the reality of the unit with those of other units of the same operation scale in the same branch, or with the statistical figures, norms of the same branch (example: Investment rate, combined profit percentage?). 6. The analytical process also includes the consideration of relations:
20
- Between financial information (Example: The relation between combined profit and turnover?); - Between financial information and non-financial information (Example: The relation between the labor expense and the number of employee?). 7. In the course of effecting the analytical process, the auditors may use various methods of from simple comparison to complicated analysis requiring advanced statistical techniques. The analytical process also applies to integrated financial report, member units? financial reports or each separate information of the financial reports. The selection of the analytical process, method and extent of application shall depend on the professional assessment of the auditors. 8. The analytical process shall be used for the following purposes: - Assisting the auditors to determine the contents, order and scopes of other auditing procedures; - The analytical process is applied as a basic experiment when the use of this measure is more efficient than the detailed examination in reducing the detected risks relating to the database of the financial report; - Examining the entire financial report in the final assessment of the audit. The analytical process shall apply when making the auditing reports 9. The auditors shall have to apply the analytical process in the course of making auditing reports in order to inquire into the business situation of units and determines areas prone to risks. The analytical process shall assist the auditors to determine the contents, order and scopes of other auditing procedures. 10. The analytical process applicable in the course of making auditing reports is based on financial information and non-financial information (Example: The relation between turnover and sale volume or between the quantity of products turned out and the capacity of machinery, equipment?). The analytical process in basic experiments 11. In the course of auditing, with a view to reducing detected risks related to the database of the financial reports, the auditors shall have to implement the analytical process or detailed examination or both. In order to determine appropriate auditing procedures for a specific auditing purpose, the auditors shall have to assess the efficiency of each auditing procedure. 12. The auditors shall have to discuss with the directors, chief accountants or representatives of the audited units about the capability to supply information and the reliability of necessary information for the application of the analytical process, including the analytical results already achieved by the units. The auditors may use the analytical data of the units if they believe in such data. 13. When applying the analytical process, the auditors shall have to consider the following factors: - The objectives of the analysis and the reliability of the obtained results; - The units? characters and the extent of information details (Example: The analytical process applicable to the financial information of each member unit shall yield more efficiency than the application only to the general information of units?);
21
- The availability of financial information and non-financial information; - The reliability of information (Example: The correctness of plans or estimates?); - The appropriateness of information (Example: The feasibly formulated plans are better than those which contain only targets to be achieved); - The sources of information (Example: Information from the outside is more reliable than information supplied by units?); - The comparability of information (Example: Information supplied by units are comparable with information of other units in the same branch?); - Knowledge gained from audits of the previous periods together with the knowledge of the efficiency of the accounting system and the internal control system, and arising matters, which have led to the adjusted book-entries in the previous period. The analytical process applicable in the stage of overall assessment of the audits 14. During the stage of overall assessment of the audits, the auditors shall have to apply the analytical process in order to get the overall conclusion on the compatibility of the major aspects of the financial report with their own knowledge about the business situation of the units. The analytical process shall assist auditors to reconfirm the conclusions obtained throughout the process of examining accounts or clauses, items on the financial report. On that basis, the auditors shall be assisted in making general conclusions on the truthfulness and logic of the entire financial report. However, the analytical process also points to matters which require the auditors to conduct the supplementary audit. The reliability of the analytical process 15. The analytical process shall apply to information which are real and interrelated. The results of analyzing the relations shall provide the auditors with auditing evidences on the adequacy, accuracy and reasonability of the data compiled by the accounting system. The reliability of the analytical process depends on the auditors? assessment of risks which cannot be detected by the analytical process (Example: The analytical results do not reflect the big fluctuation or disparity but there are in fact important errors?). 16. The reliability on the results of the analytical process depends on the following factors: - The importance of accounts or operations (Example: For goods in stock , which are considered important, not only the analytical process but also other procedures for detailed inspection shall be applied before making conclusions. On the contrary, for collectable debts which are considered unimportant, only the analytical results may be used as basis for making conclusions...); - Other auditing procedures for the same auditing target (Example: The procedure for inspection of the money-collecting operation before the date of book closure for collectable amounts shall confirm or deny the results of the process of analyzing debts to be collected according to time-limits,?); - The anticipated accuracy of the analytical process (Example: Auditors often prefer the comparison and analysis of the combined profit percentages between the current year and the previous year to the comparison of irregular expenses between the previous year and the current year?); - The evaluation of potential risks and controllable risks (Example: If the internal control of the sale section is weak, it is better to rely on the detailed inspection than on the analytical process?).
22
17. The auditors must re-check the control procedures in order to create information for use in the analytical process. Where the control procedures are effective, the auditors shall put more trust on the reliability of the information and the analytical results are also more reliable. The auditors must examine simultaneously the accounting control procedures and the non-financial information control procedures (Example: Where the units control the making of sale invoices together with the quantity of sold goods, the auditors shall check simultaneously the procedures for control of sale invoices and control of the quantity of sold goods). Investigation of unusual factors 18. Where the analytical process detects important disparities or irrational relationships among corresponding information, or big disparities with the estimated data, the auditors shall have to carry out the investigation procedures in order to adequately collect appropriate auditing evidences. 19. The investigation of import disparities or irrational relationships often start by requesting the directors (or heads) of the audited units to supply information and proceed with the following procedures: - Reexamining the answers of the directors (or the heads) by comparing them with other auditing evidences already obtained in the course of auditing; - Considering and implementing other procedures if the directors (or the heads) are still unable to give the explanation or have given unsatisfactory explanation./.
23
Standard No 580- Directors expositions
STANDARD No. 580 DIRECTORS? EXPOSITIONS (Issued together with the Finance Minister?s Decision No. 219/2000/QD-BTC of December 29, 2000) GENERAL PROVISIONS 1. This standard aims to prescribe the basic principles and procedures and guide the ways of applying the basic principles and procedures to the gathering and use of the expositions of the directors (of the heads) of the audited units as auditing evidences, the procedures applicable to evaluate and archive the expositions of the directors (or the heads) of the units, the handling measures when the directors (or the heads) of the units refuse to supply appropriate expositions in the process of auditing financial reports. 2. The auditors shall have to gather expositions of the directors (or the heads) of the audited units. 3. This standard shall apply to the audit of financial reports and also to the audit of other financial information and relevant services of the auditing companies. The auditors and auditing companies shall have to abide by the provisions of this standard in the course of auditing the financial reports. The audited units (customers) and the parties using the auditing results must have necessary knowledge of this standard for coordination with the auditors and auditing companies in work as well as in handling of relations in auditing. Terms used in this standard shall be understood as follows: 4. Directors (or the heads) are the highest representatives at law of enterprises or organizations such as directors, general directors, owners, heads of units. In a number of cases, the heads are chairmen of the Managing Councils or the Management Boards (hereinafter called collectively the directorates). CONTENTS OF THE STANDARD The audited unit directors? acknowledge of the responsibility for the financial reports 5. The auditors shall have to gather evidences on the acknowledgement by the directors of the audited units of their responsibility for making and presenting the financial reports truthfully, reasonably and in conformity with the current (or accepted) accounting standards and regimes and having approved the financial reports. The auditors shall gather the above-said evidences in the minutes of meetings of the Management Boards (or directorates) related to this matter, or by way of requesting the directors so supply the "expositions ", the "director?s report" or the "financial reports" already signed for approval by the directors. Using directors? expositions as auditing evidences 6. In case of lack of appropriate auditing evidences, the auditors shall have to gather the written expositions of the directors of the audited units on matters which are deemed to greatly affect the financial reports. In order to limit the misunderstanding between auditors and directors of the units, the written explanations must be re-certified in writing by the directors. Appendix No.1 gives examples on matters expressed in the written expositions of directors or in the auditors? written requests for certification by the directors.
24
07. Matters requested to be explained in writing by directors are restricted to specific or general matters which greatly affect the financial reports. For matters which are deemed necessary, the auditors shall have to inform the directors clearly of their opinions on the importance of the matters which should be explained. 08. In the course of auditing, the directors (or heads) of the audited units shall send their written expositions to the auditors and auditing companies voluntarily or at the request of the auditors. When the expositions are related to matters which greatly affect the financial reports, the auditors shall have to do the following: - Gathering auditing evidences from information inside or outside the units for verification of the directors? expositions; - Assessing the reasonability and consistency between the directors? expositions and other gathered auditing evidences; - Determining the extent of understanding about the explained matters by the exposition makers. 9. The directors? expositions cannot substitute the auditing evidences gathered by auditors. (Example: The director?s explanation about the cost price of a fixed asset cannot substitute the auditing evidence on the cost price of that asset such as invoice issued by the seller or the approved report on settlement of completed project). The auditors? failure to adequately gather appropriate auditing evidences on a matter which greatly affects the financial report while such evidences can be gathered will lead to the restriction on the auditing scope though that matter has already been explained by the director. 10. In a number of cases, the directors? expositions are the only gathered auditing evidence. (Example: Auditors must not gather other evidences to prove the director?s decision to make some long-term investment?). 11. The auditors shall have to inquire into the reasons when the directors? expositions contradict other auditing evidences and, when necessary, have to re-verify the reliability of the auditing evidences and the director?s expositions. Archiving into the auditing files the directors? expositions 12. The auditors shall have to keep in the auditing files the directors? expositions in form of summarizing the verbal exchanges or written explanations for use as auditing evidences. 13. The written expositions evaluated as auditing evidences are more valuable than the verbal explanations. The written expositions are demonstrated in the following forms: - The director?s written exposition; - The auditor?s letter listing all his/her understanding of the director?s explanations, which are certified by the director as correct; - The minutes of meetings of the Management Boards or financial reports already signed for approval by the directors. Basic details of a written exposition
25
14. When requesting the unit?s director to make the exposition, the auditor shall have request that such documents be addressed directly to him/her with the contents: the information to be explained, day, month, full name and signature of the exposition maker of his/her certification in the exposition. 15. Usually, the director?s written exposition is inscribed with the same day and month inscribed on the auditing report. Some cases require the making of written explanations right in the course of auditing or after the date inscribed on the financial report but before the date inscribed on the auditing report. In specific cases, the explanation is made and announced after the issuance of the auditing report. (Example: the date of issuance of shares?). 16. The director?s exposition is usually signed by the director (or the head) of the unit. In a number of cases, auditors are allowed to receive the explanations from other members authorized by the directors. (Example: Auditors wish to gather the written certification of the adequate supply of all the minutes of the shareholders? congresses, the minutes of meetings of the directorates or the Management Boards from people who are in charge of keeping these minutes?). Handling measures to be applied if directors refuse to supply explanations 17. If directors refuse to supply explanations requested by auditors, thus restricting the auditing scope, the auditors must give their "opinion of partial acceptance" or "opinion of refusal". In this case, the auditors shall have to re-evaluate the reliability of all other explanations of the directors in the course of auditing and consider the extent of their effect on the financial report.
26
Standard No 240- Fraud and error
STANDARD 240 FRAUD AND ERROR (Issued in pursuance of the Minister of Finance Decision No. 143/2001/QD-BTC dated 21 December 2001) GENERAL 1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and fundamental principles and provide guidance on the auditor and the audit firms responsibility to consider fraud and error in an audit of financial statements. When planning and performing audit procedures and in evaluating and in evaluating and reporting the results thereof, the auditor and the audit firm should consider the risk of material misstatements in the financial statements resulting from fraud or error. This VSA applies to audits of financial statements and also applies to an audit of other financial information and related services rendered by the audit firm. The auditor and the audit firm should comply with this VSA in conducting an audit of financial statements. It is expected that the client entity and users of the audit report should possess essential knowledge as to the objectives and principles set out in this VSA in working with auditor and the audit firm, and dealing with the relations maintained in respect of the information under audit. In this VSA, the following terms have the meaning attributed below: 4. Fraud refers to an intentional act to cause economic, financial information to be misleading by one or more individuals among the Board of Management and Directors employees, or third parties, which results in a misrepresentation of financial statements. Fraud may involve the following acts: 5. Manipulation, falsification of records or documents relating to financial statements; Alteration of records or documents, which causes misrepresentations of financial statements; Misappropriation of assets; Suppression or intentional omission of information, records of documents and transactions which causes misrepresentations of financial statements; Recording of transactions without substance; Misapplication of accounting standards, principles, procedures and policies and financial regulations; Intentional commitment of mathematical mistakes.
2.
3.
Error refers to unintentional mistakes in financial statements, such as: - Mathematical or clerical mistakes in the underlying records; - Oversight or misinterpretation of amounts and transactions; - Misapplication of accounting standards, principles, procedures and policies and financial regulations.
CONTENTS OF THE VSA Responsibility of the Director (or leader)
27
6.
The responsibility for the prevention, detection and handling of fraud and error in the entity rests with the Director (or leader) through the implementation and continued operation of adequate accounting and internal control systems. Because of the inherent limitations of the accounting and internal control systems, it is impossible to eliminate the possibility of fraud and error.
Responsibility of the Auditor and the Audit Firm 7. Through the audit, the auditor and the audit firm are to assist the client entity in detecting, handling and deterring fraud and error. However, the auditor and the audit firm are not and cannot be held responsible for the prevention of fraud and error in the client entity.
Risk Assessment 8. In planning and performing the audit, the auditor and the audit firm should assess the risk that fraud and error may exist that materially impact the financial statements and should inquire of the Director (or leader) as to any fraud or significant error which has been discovered. In addition to weaknesses in the design and performance of the accounting and internal control systems, conditions or events which increase the risk of fraud and error include: Questions with respect to the integrity or competence of management; Unusual pressures within or on an entity; Unusual transactions and events; Problems in obtaining sufficient appropriate audit evidence. Factors unique to computer information system environment relating to the above conditions and events. (Examples of these conditions or events are set out in Appendix 01). Detection 10. Based on the risk assessment, the auditor should design audit procedures to obtain reasonable assurance that fraud and error that are material to the financial statements taken as a whole are detected. 11. Consequently, the auditor seeks sufficient appropriate audit evidence that fraud and error which may be material to the financial statements have not occurred or that, if they have occurred, the effect of fraud is properly reflected in the financial statements or the error is corrected. The auditor should point out the impacts of such fraud and error on the financial statements. The likelihood of detecting errors ordinarily is higher than that of detecting fraud, since fraud is higher than that of detecting fraud, since fraud is ordinarily accompanied by acts specifically designed to conceal its existence. 12. Due to the inherent limitations of an audit, although the auditor adheres to all audit principles and procedures, there is an unavoidable risk that material misstatements in the financial statements resulting from fraud and error may not be all detected. When such a risk occurs that causes material impact on the financial statements, the auditor would consider compliance with principles and audit procedures undertaken in the circumstances and the suitability of the audit report based on the results of those audit procedures. Inherent Limitations of an Audit 13. An audit is subject to the unavoidable risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in
9.
28
accordance with Vietnamese Standards on Auditing or International Standards on Auditing generally accepted. 14. The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a material misstatement resulting from error, because fraud ordinarily involves acts designed to conceal it. Unless the audit reveals evidence to the contrary, the auditor is entitled to accept representations as truthful and records and documents as genuine. However, the auditor should plan and perform the audit with an attitude of professional skepticism, recognizing that conditions or events may be found that result in material misstatements in the financial statements. 15. Because of the inherent limitations of the accounting and internal control systems, there will always be some risk of fraud and error occurring that is material to the financial statements. An internal control system may be ineffective against fraud involving collusion among employees or fraud committed by management. Procedures When there is an Indication that fraud or Error May Exist 16. When the application of audit procedures indicates the possible existence of fraud or error, the auditor and the audit firm should consider the potential effect on the financial statements. If the auditor and the audit firm believe the indicated fraud or error could have a material effect on the financial statements, the auditor should perform appropriate modified or additional procedures. 17. The extent of such modified or additional procedures depends on the auditors judgment as to: (a) the types of fraud and error indicated; (b) the frequency of their occurrence; and (c) the likelihood that re-occurrence; and Unless circumstances clearly indicate otherwise, the auditor cannot assume that an instance of fraud or error is an isolated occurrence. If necessary, the auditor adjusts the nature, timing and extent of substantive procedures. 18. Performing modified or additional procedures would ordinarily enable the auditor to confirm or dispel a suspicion of fraud or error. Where suspicion of fraud or error is not dispelled by the results of modified or additional procedures, the auditor and the audit firm should discuss the matter with management and consider whether the matter has effected on the financial statements and the audit report. 19. The auditor should consider the implications of fraud and significant error in relation to other aspects of the audit, particularly the reliability of management representations. In this regard, the auditor reconsiders the risk assessment and the validity of management representations, in case of fraud and error not detected by the accounting and internal control systems or not included in management representations. The implications of particular instances of fraud of error discovered by the auditor will depend on the relationship of the perpetration and concealment, if any, of the fraud or error to specific control procedures and the level of management or employees involved. Reporting of Fraud and Error To the Director (or leader) 20. The auditor and the audit firm should communicate factual findings to the Director (or leader) of the client entity as soon as practicable prior to the date of publication of the audited financial statements or the issuance of the audit report if: a) the auditor suspects fraud may exist, even if the potential effect on the financial statements has not been measured;
29
b) fraud is found to exist; or c) significant error is found to exist. 21. Suspecting fraud exist or having detected any occurrences of possible of actual fraud or significant error, the auditor would consider all the circumstances as to which level of authority to report the case to. With respect to fraud, the auditor would assess which management level is likely to involve. In most cases involving fraud, it would be appropriate to report the matter to a level in the organization structure of the entity above that responsible for the persons believed to be implicated. When doubts are raised as to the involvement of the highest authority, the auditor would ordinarily seek legal advice to assist in the determination of procedures to follow. To Users of the Audit Report on the Financial Statements 22. If the auditor and the audit firm conclude that the fraud or error has a material effect on the financial statements and has not been properly reflected or corrected in the financial statements, the auditor should express a qualified or an adverse opinion. The auditor and the audit firm should clearly state in the audit report fraud and error that may be material to the financial statements even though they are adequately reflected in the financial statements. 23. If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate whether fraud or error that may be material to the financial statements, has, or is likely to have, occurred, the auditor and the audit firm should express a qualified opinion or a disclaimer of opinion on the basis of a limitation on the scope of the audit. 24. If the auditor is unable to determine whether fraud or error has occurred because of limitations imposed by the circumstances or by the entity, the auditor should consider the effect on the audit report. To Regulatory and Enforcement Authorities 25. The auditor and the audit firm are to keep the clients information and data confidential, except when the client entity has committed fraud or error which, as statutorily required, the auditor and the audit firm are to report to the supervisory authorities. In this case, the auditor and the audit firm may need to seek legal advice in advance in such circumstances. Withdrawal from the Engagement 26. The auditor and the audit firm may conclude that withdrawal from the engagement is necessary when the entity does not take the remedial action regarding fraud that the auditor considers necessary in the circumstances, even when the fraud is not material to the financial statements. Factors that would affect the auditors conclusion include the implications of the involvement of the highest authority within the entity, and the effects on the auditor of continuing association with the entity. In reaching such conclusion, the audit firm would consider the case and seek legal advice. 27. On receipt of an inquiry from the proposed auditor for information on the client entity, the existing auditor should advise any professional reasons for withdrawal from the engagement. The existing auditor would, taking account of the legal and ethical constraints including where appropriate permission of the client, give details of and discuss freely with the proposed auditor such information. If permission from the client to discuss its affairs with the proposed auditor is denied by the client, the existing auditor and the audit firm should disclose that fact to the proposed auditor.
30
APPENDIX 01 Examples of Conditions or Events Which Increase the Risk of Fraud or Error Questions with respect to the integrity or competence of management Management is dominated by one person (or a small group) an there is no effective oversight of the Directors of Board of Management; There is a complex corporate structure where complexity suggests a deliberate act; There is a continuing failure to correct major weaknesses in internal control and accounting systems where such corrections are practicable; There is a significant and prolonged understaffing of the accounting department; Accounting work is assigned to incompetent persons or those prohibited by law; and There are frequent changes of legal counsel or auditors.
Unusual pressures within or on an entity The industry is declining and failures are increasing; There is inadequate working capital due to declining profits or too rapid expansion; The quality of earnings is deteriorating, The entity needs a rising profit trend to support business operations; The entity has such a significant investment in an industry or product line that its finance loses balance; The entity is heavily dependent on one or a few products or customers; Financial pressure on investors or top managers; Pressure is exerted on accounting personnel to complete financial statements in an unusually short time period.
Unusual transaction and events Unusual transactions, especially near the year-end, that have an effect on sales, expenses and earnings; Complex transactions of accounting treatments; Transactions with related parties; Payments for services (for example, to lawyers, consultants or agents) that appear excessive in relation to the services provided;
Problems in obtaining sufficient appropriate audit evidence Inadequate records or untimely provision of records (for example, incomplete files, excessive adjustments to books and accounts, transactions recorded inadequately and out of balance control accounts; - Inadequate documentation of transactions (for example, lack of proper authorization or supporting documents for large or unusual transactions); - An excessive number of differences between accounting records and third party confirmations, conflicting audit evidence and unexplainable changes in operating ratios; - Evasive or unreasonable responses by management to audit inquiries. Some factors unique to a computer information systems environment which relate to the conditions and events described above include: Inability to extract information from computer files; Large numbers of program changes that are not documented, approved and tested; Data out of the computer are not matched with the financial statements; Print-outs of one account give different results.
31
Standard No 300- Planning
STANDARD 300 PLANNING (Issued in pursuance of the Minister of Finance Decision No. 143/2001/QD-BTC dated 21 December 2001) GENERAL 1. 2. 3. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and fundamental principles and provide guidance on planning an audit of financial statements. The auditor and the audit firm should plan the audit work so that the audit will be performed in an effective manner. This VSA applies to audits of financial statements and also applies to an audit of other financial information and related services rendered by the audit firm. In the case of the first-year audit for a client, the auditor should expand the procedures of planning based upon the contents of this VAS. The auditor and the audit firm should comply with this VSA in preparing and realizing an audit plan. It is expected that the client entity should possess essential knowledge of this VSA in joining the audit and dealing with the relations maintained during the audit planning. In this VSA, the following terms have the meaning attributed below: 4. General strategy means the core direction, focal content and general approach developed at the top level of an audit based upon their knowledge of the client entitys business operations and environment. Overall audit plan means developing the general strategy and detailed approach for the expected nature, timing and extent of the audit. It is the objective of an overall plan to enable the auditor to perform the audit in an efficient and timely manner. Audit program refers to a set of instructions to the auditor and assistants involved in an audit and a means to control and record the proper execution of the work. The audit program may also contain the audit objectives for each area, the nature, timing and extent of planned audit procedures and the time needed for each area of work. Multi-year audit is an audit conducted at time of the current years financial statements and those of the prior year (s). For example, in 2001, an audit is conducted of the financial statements of 2000, 1999 and 1998.
5.
6.
7.
CONTENT OF THE VAS Planning the Work 8. Planning should be developed for each audit. Adequate planning of the audit work helps to ensure that appropriate attention is devoted to important areas of the audit, that frauds, errors and potential problems are identified and that the work is completed expeditiously. Planning also assists in proper assignment of work to assistants and in coordination of work done by other auditors and experts.
32
9.
The extent of planning will vary according to the size of the entity, the complexity of the audit and the auditors experience with the entity and knowledge of the business.
10. Obtaining knowledge of the business is an important part of planning the work to assist in the identification of events, transactions and practices which may have a material effect on the financial statements. 11. Planning remains the auditor and the audit firms responsibility. To plan the audit, the auditor can require discussion with the entitys internal auditors, management and staff of issues associated with the audit plan and procedures to improve the effectiveness and efficiency of the audit and to coordinate audit procedures with work of the entitys personnel. 12. Planning has three components: General strategy; Overall audit plan; Audit program.
General strategy 13. A general strategy should be developed for an audit of big size, and with complexity and large coverage, or for a multi-year audit. 14. An audit of big size is an audit of combined financial statements (or consolidated financial statements) of a corporation with a number of subsidiary entities of the same or different industry. 15. An audit with complexity means an audit which reveals indication of dispute and litigation or which deals with new business launches about which the auditor and audit firm are not experienced enough. 16. An audit with large coverage is an audit of an entity with subsidiaries in various provinces and municipalities, including those across the border. 17. A multi-year audit is conducted as a consequence of an audit firm signing a contract for audit of some consecutive years, for example, in 2000, an audit contract is signed in regard to 2000, 2001 and 2002. In this case, a general strategy should be developed for directing the work and combining the audits of respective years. For its special management purpose, an audit firm may wish to develop a general strategy for an audit having no features discussed in paragraph 13 through 17 herein. 18. The general strategy contains key objectives, core direction, focal content, general approach and intended progress of an audit (see Appendix 01) 19. The general strategy is prepared by the in-charge personnel and ratified by the Director (or leader) of the audit firm. The general strategy underlies planning the audit, monitoring the implementation and reviewing the audit results. 20. A general strategy will be documented into a separate file or as part of the overall audit plan. Overall Audit Plan 21. An overall audit plan is developed for each audit, with description of the expected scope and conduct of the audit. The overall audit plan will need to be sufficiently detailed to guide the development of the audit program. The form and content of an audit plan will vary depending on
33
the size of the entity, the complexity of the audit and the specific methodology and technology used by the auditor. 22. Matters to be considered by the auditor in developing the overall audit plan include: Knowledge of the Business - General economic factors and industry conditions affecting the entitys business; - Important characteristics of the entity, its business, its financial performance and its reporting requirements including changes since the date of the prior audit; - The general level of competence of management. Understanding the Accounting and Internal Control Systems The accounting policies adopted by the entity and changes in those policies; The effect of new accounting or auditing pronouncements; The auditors cumulative knowledge of the accounting and internal control systems and the relative emphasis expected to be placed on tests of control and substantive procedures.
Risk and Materiality - The expected assessments of inherent and control risks and the identification of significant audit areas; - The setting of materiality levels for audit purposes; - The possibility of material misstatement, including the experience of past periods, or fraud and common error; - The identification of complex accounting transactions and events including those involving accounting estimates. Nature, Timing and Extent of Procedures - Possible change of emphasis on specific audit areas; - The effect of information technology on the audit; - The work of internal auditing and its expected effect on external audit procedures. Coordination, Direction, Supervision and Review - The involvement of other auditors in the audit of components, for example, subsidiaries, branches and divisions; - The involvement of experts in other areas; - The number of locations; - Staffing requirements. Other Matters - The possibility of the business going concern; - Conditions requiring special attention, such as the existence of related parties; - The terms of the engagement and any statutory responsibilities; - The nature and timing of reports or other communication with the entity that are expected under the engagement. 23. In case of a general strategy already prepared, its content would not need to be re-stated in the overall audit plan. (see Appendix 02 for sample overall audit plan). Audit Program 24. An audit program should be developed for each audit, setting out the nature, timing and extent of planned audit procedures required to implement the audit plan.
34
25. In preparing the audit program, the auditor would consider the specific assessments of inherent and control risks and the required level of assurance to be provided by substantive procedures. The auditor would also consider: - the timing of tests of controls and substantive procedures; - the coordination or any assistance expected from the entity, the availability of assistants and the involvement of other auditors or experts. (see Appendix 03 for sample audit program). Changes to the Audit Plan and Audit Program 26. The overall audit plan and the audit program should be revised as necessary during the course of the audit because of changes in conditions or unexpected results of audit procedures. The contents of and reasons for significant changes would be recorded as part of audit documentation. 27. An audit firm using a sample audit program either in the computer or on paper should have additional contents to the audit program relevant to each audit. APPENDIX 01 SAMPLE GENERAL STRATEGY (for guidance and reference) AUDIT FIRM: GENERAL STRATEGY Client entity:Prepared byDate: Year:. Approved by:..Date: Client feature: (large scale audit, multi-year audit or complexity audit) Requirement General strategy is developed for an audit of big size, and with complexity and large coverage, or for a multi-year audit. General strategy is prepared by the in-charge personnel and approved by the Director (or leader) of the audit firm. The audit team shall comply with the firms relevant regulations and the directions ratified by the Director in connection with the general strategy. Any departures from managements initial estimation noticed during the process of developing an overall audit plan and implementing the audit should be promptly reported to management for timely solutions.
Contents and procedures of a general strategy 1. Understand the client entitys business (information gathered on industry, business type, ownership title, production technology, management structure and business operations) particularly the main factors, such as competition drive, business superiority analysis as well as production, market, prices and post sales services; 2. Locate areas concerned with the financial statements, such as accounting regimes and systems, accounting standards in use, financial reporting constraints and the entitys rights; 3. Locate main risk areas of the entity and their effects on the financial statements (initial assessment of inherent risk and control risk);
35
4. Assess the internal controls; 5. Identify the focal objectives and audit approach; 6. Determine the need for expertise coordination with legal advisors, internal auditors, other auditors and experts in such field as construction, agriculture; 7. Nominate team head and time the work; 8. The Director approves and notifies the audit team of the general strategy, based on which the team head develops an overall audit plan and audit program. APPENDIX 02 SAMPLE OVERALL AUDIT PLAN (for guidance and reference) AUDIT FIRM: OVERALL AUDIT PLAN Client entity:.Prepared by:.Date: Year:.. Approved by:Date. 1. Information about the entitys business operation: - Client audit: First year Recurrent Year:.. - Client name: - Head office: Branches (number and locations).. Phone no:. Fax no:.Email:. Tax code:.. Operation license (Investment license, business registration certificate) Industry: (steel production, hospitality service, golf court service,) Geographic feature: (nation-wide, foreign operations) Total legal capital:Investment capital:.. Total loan capital:.Financial lease:. Business duration: (from.to., no time limit).. Board of Management: (number of members, list of key personnel) .. Board of Directors: (number of members, list of members) Chief accountant; (name, years with the company).. Holding company, partners (joint businesses). Client internal controls outlined.. Managements competence: General understanding of the economic conditions affecting the entitys business: ................................................................... .................................................................................................. ..................................................................................................
- Client business lines and environments: + Environmental requirements: + Market and competition:.. + Operational features and technological changes: + Business risk: + Change in business size and disadvantages:
36
. + - Performance features (products, market, suppliers, expenses, transactions): + Changes in application of advancements or new technologies to production: .. + Change of suppliers:. + Expansion of sales network: (establishments) .. 2. Understanding of accounting and internal control systems: Based on the review of client financial statements and understanding of its business to consider the level of effects on the preparation of financial statements in terms of: + The accounting policies adopted by the entity and . + The effect of information technology and computer system:. + The effect of new policies on accounting and auditing:. + Accounting staff: + Reporting requirement:.. changes in those policies:
Assessing and rating the control environment, accounting system, and internal controls as reliable and effective: High Medium Low
3. Risk assessment and materiality measurement: - Risk assessment: + Inherent risk: High Medium Low + Assessment of internal controls operations: . Materiality measurement:
Key indicators for measuring materiality levels include: Current year - Sales - Expenses - Post-tax income - Current assets and short-term investments - Fixed assets and long-term investments - Funds - Other indicators Reason for choice of materiality level:.. Assessment of materiality levels for each audit objective. - The possibility of material misstatement, including the experience of past periods, or common fraud and error; The identification of complex accounting transactions and events including those involving accounting estimates. - Account audit approach: Preceding year
37
+ Sample test + Key item test. + 100% examination: 4. Nature, Timing and Extent of Procedures - Identification of significant changes of audit areas. - The effect of information technology on the audit. - The work of internal auditing 5. Coordination, Direction, Supervision and Examination - The involvement of other auditors - The involvement of legal and other experts .. - The number of locations.. - Staffing requirements.. + In-charge director (deputy director). + In-charge manager. + Audit team head. + Audit assistant 1. + Audit assistant 2. + 6. Other matters - Interim audit; Inventory taking; - The possibility of the business going concern: - Conditions requiring special attention; - The contractual terms and any statutory responsibilities; - The nature and timing of the report audit or other communication with the entity. 7. Overall audit plan summary No. 1 2 3 4 Significant or items factors Inherent risk Control risk Matlity level Audit Audit Ref. approach produre
- General classification of client Very important Important - Other: Not important
APPENDIX 03 SAMPLE AUDIT PROGRAM (for guidance and reference) AUDIT FIRM: AUDIT PROGRAM Client entity:Prepared byDate. Year.Approved byDate LIST OF WORK PARTS
38
1. General Reference 2. Accounting and internal control 3. Cash 4. Short-term investment 5. Accounts receivable 6. Inventory 7. Other current assets 8. Non profit expenditure 9. Fixed assets 10. Intangible assets and other fixed assets 11. Long-term investment 12. Construction in progress 13. Long-term deposits and mortgages 14. Current liabilities 15. Taxes payable 16. Long-term borrowings and debts 17. Funds and undistributed earnings 18. Budget sources 19. Revenues 20. Cost of sales 21. Selling expenses, administrative expenses 22. Other incomes 23. Other expenses 24. Others
A B C D E F G H I J K L M N O P Q R S T U V X W
AUDIT FIRM: TEST-CASH PROGRAM Client name:Financial year:.. Team head:..Date:. Team members Reviewer 1:.Date: Reviewer 2:..Date:.. I. Documents to be produced by client: 1. Period-end count minute (Where the auditor did not observe the counting on the intended date, it is necessary for him/her to combine with the client entity to conduct a surprise count of cash by the time of audit and backdate addition (+) or deduction (-) for the actual cash balance at year-end). 2. Basis of discrepant treatment (as a consequence of cash count): 3. Bank reconciliation of account balance 4. Bank ledgers 5. General ledger 6. Cash journal 7. Petty cash ledger and bank ledger 8. Relative papers II. Audit targets:
39
- Existence, completeness, accuracy - Ownership and obligation - Valuation - Presentation and disclosure III. Audit procedures: Procedures A. Analytical procedures 1. Test movement of cash on hand and cash in bank through the years 2. Inquire the entitys settlement system if it is made in cash or by bank 3. Review internal controls on the entitys capital in cash to ensure adherence to the principle of: - Segregation of tasks and responsibilities Freedom from other responsibility - Approval and assignment of management of cash B. Substantive test procedures I. Petty cash 1. Compare cash count minute with cashbook, ledger and general ledger to ascertain if cash balance on the balance sheet is adequately disclosed. 2. Screen cash book for irregular items and trace them to source documents to ensure fair presentation thereof. 3a.Randomly take ...... months and for each month choose ... transactions from ledger (or subledger) for sure of the matching between the book and documents as to nature, date and amount. At the same time check the acceptance of the entitys relevant personnel. . If results are good: accept it . If results are unsatisfactory, expand substantive tests. 3b. Randomly takemonths and for each month choose
Cash balance which represents the total sum on hand, in bank and in transit at the time of observation is existing and properly recorded. All existing cash is owned by the entity. Cash balance disclosed on the balance sheet is properly valued. Cash balance is adequately presented, classified and disclosed Exception Yes/no Identified Performer signing
Reference
40
documents to make sure records kept (in cash book, ledger and sub-ledger) are appropriate. 4. Taketransactions occurring before date and transactions after date to verify whether cutoff procedures are correct and appropriate. II. Bank balance and cash in transit 1. Review if any account has been confirmed which left no balance in the prior year. Every account is to be confirmed. 2. Draw up bank balance reconciliation. a. Check additions. Consider unusual items (of significant value). b. Agree sub-account balances to the ledger and bank ledger at year-end. c. Examine the reconciliation of any two months for each account to observe unusual items and reconsider the timing and accuracy. Also examine relevancy personnels approval. 3. Collect bank confirmations and test records in the entitys accounting books. - Account for differences (if any) at the closing date. - Reconcile all deposits which are yet to be recorded at year end to bank ledger after date. 4. See if amounts being transferred listed under Cash in transit are appropriate (only significant items). a. Trace them to deposit book, and transfer notes as to date, amount, description. b. Trace them to year-end bank ledger. Make notes of deposits which are recorded by the bank after date. c. Consider deposits which are recorded by the bank on a proper date (1-2 days after date of posting by the entity). d. Review prior years financial statements and current years working papers to ensure reconciled figures are included in
41
documentation. C. Additional audit procedures - See if balances in foreign currencies have been revalued using average inter-bank rates of the closing date. -Other procedures (if any) IV. Conclusion and recommendations A. Conclusions and audit objectives: . . B. Recommendations: .. C. Matters that need following up in subsequent audits: .. Date of completion: Performer:.
42
Standard No 400- Risk assessments and internal control
STANDARD 400 RISK ASSESSMENTS AND INTERNAL CONTROL (Issued in pursuance of the Minister of Finance Decision No. 143/2001/QD-BTC dated 21 December 2001) GENERAL 1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and fundamental procedures and provide guidance on obtaining an understanding of the accounting and internal control systems and on assessing audit risk and its components: inherent risk, control risk and detection risk during an audit of financial statements. The auditor should obtain an understanding of the accounting and internal control systems sufficient to prepare an overall audit plan and develop an effective, appropriate audit approach. The auditor should use professional judgment to assess audit risk and to design audit procedures to ensure it is reduced to an acceptably low level. This VSA applies to audits of financial statements and also applies to audits of other financial information and related services rendered by the audit firm. The auditor and the audit firm should comply with this VSA in conducting an audit of financial statements and rendering related services It is expected that the client entity and users of the audit report should possess essential knowledge as to the principles set out in this VSA in working with the auditor and the audit firm, and dealing with the relations maintained during the audit. In this VSA, the following terms have the meaning attributed below: Inherent risk is the susceptibility of an account balance or class of transactions to misstatement that could be material individually or when aggregated with misstatements in other balances or classes, assuming that there were no related-internal controls. Control risk is the risk that a misstatement, that could occur in an account balance or class of transactions and that could be material individually or when aggregated with misstatement in other balances or classes, will not be prevented or detected and corrected on a timely basis by the accounting and internal control systems. Detection risk is the risk that misstatement exists in an account balance or class of transactions that could be material individually or when aggregated with misstatements in other balances or classes that the auditor and the audit firm fail to detect. Audit risk means the risk that the auditor and the audit firm give an inappropriate audit opinion when the financial statements are materially misstated. Audit risk has three components: inherent risk, control risk and detection risk. Audit risk assessment is the work carried out by the auditor and audit firm to assess the degree in which audit risks may occur, which include the assessment of inherent risk, control risk and detection risk. Audit risk is assessed before the planning stage and before audit performance. Materiality is a term which denotes the importance of information or a disclosure in the financial statements. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the
2.
3.
4.
5.
6.
7.
8.
9.
43
item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality should be viewed in respect of both quantitative and qualitative characteristics. 10. Internal control system means all the policies and procedures designed and adopted by an entity to assist compliance with the provisions of law and relevant regulations for prevention and detection of fraud and error, preparation of financial statements that give a true and fair view, and effective safeguarding, management and use of its assets. The internal control comprises the control environment, accounting system, and control procedures. 11. Accounting system means the series of policies and procedures of an entity by which records are maintained and financial statements prepared. 12. Control environment means the understanding, attitude, awareness and actions of members of the boards of Management and Directors regarding the internal control system and its importance in the entity. The control environment has an effect on the effectiveness of the specific control procedures. A strong control environment can significantly complement specific control procedures. However, a strong environment is not synonymous with a strong internal control system. Such environment does not, by itself, ensure the effectiveness of the internal control system. 13. Control procedures are those policies and procedures which management has established to achieve the entitys specific objectives. CONTENTS OF THE VSA 14. When developing the audit approach, the auditor considers the preliminary assessment of inherent risk and control risk to determine the appropriate detection risk to accept for the financial statement assertions and to determine the nature, timing and extent of substantive procedures for such assertions. Inherent Risk 15. In developing the audit plan, the auditor and the audit firm should assess inherent risk at the financial statement level. In developing the audit program, the auditor should relate such assessment to material account balances and classes of transactions at the assertion level, or otherwise assume that inherent risk is high for the assertion. Based on the assessment on the inherent risk, the auditor estimates the work to conduct and procedures to follow for material balances and transactions in the financial statements, or balances and transactions for which, in the auditors judgment, inherent risk is high (see Appendix 01). 16. To assess inherent risk, the auditor uses professional judgment to evaluate the following major factors: + At the Financial Statement Level - The integrity, experience and knowledge of management and changes in management during the period; - The experience and competence of the chief accountant, key accounting personnel and internal audit staff and changes (if any) with them; - Unusual pressures on management and the chief accountant, in particular circumstances that might predispose management and the chief accountant to misstate the financial statements; - The nature of the entitys business, for example, technological designs, capital structure, the number of locations, geographical spread and seasonal feature of production; - Factors affecting the industry in which the entity operates, for example, changes in economic and competitive conditions, in purchasing and selling market and in accounting practices common to the industry. + At the Account Balance and Class of Transactions Level
44
Financial statement accounts likely to be susceptible to misstatement, for example, accounts which required adjustment in the prior period or which involve a high degree of estimation; or changes in accounting practice which took place during the period; Measurement of account balances and business transactions, such as balances of provision accounts, transactions with extra-ordinary repairs either expensed or added to the cost of fixed assets. Susceptibility of assets to loss or misappropriation, for example, numerous receipts and expenditures in cash, cash advanced in large amounts and over a long time, The complexity of underlying transactions and other events which might require using the work of an expert, for example litigations or thefts The completion of unusual and complex transactions, particularly at or near period end; Other unusual financial and business transactions.
Accounting and Internal Control Systems 17. Internal controls relating to the accounting system are maintained to ensure: - Transactions are executed in accordance with the authorization of relevant personnel; - All transactions are promptly recorded in the correct amount, in the appropriate accounts and in the proper accounting period so as to permit preparation of financial statements in accordance with the prevailing accounting regulations; - Access to assets and records is permitted only in accordance with managements authorization; - Recorded assets are compared with the existing assets counted at reasonable intervals and appropriate action is taken regarding any differences. Inherent Limitations of Internal Controls 18. Accounting and internal control systems cannot provide management with conclusive evidence that objectives are reached because of inherent limitations, such as: - Managements usual requirement that the cost of an internal control does not exceed the expected benefits to be derived; - Most internal controls tend to be directed at routine transactions rather than non-routine transactions; - The potential for human error due to carelessness, distraction, mistakes of judgment and the misunderstanding of instructions; - The possibility of circumvention of internal controls through the collusion of a member of management or an employee with parties outside or inside the entity; - The possibility that a person responsible for exercising an internal control could abuse that responsibility; - The possibility that procedures may become inadequate due to changes in the existing mechanism and management requirement and compliance with procedures may deteriorate. Understanding the Accounting and Internal Control Systems 19. Within the scope of a financial statement audit, the auditor is mainly concerned with the accounting and internal control policies and procedures pertaining to assertions in the financial statements. Understanding of the accounting and internal control systems of the entity under audit and the assessment of inherent risk and control risk would assist the auditor in: - Locating the audit scope required for material misstatements likely to exist in the financial statements; - Reviewing factors which may result in material misstatements; and, - Designing relevant audit procedures. 20. When obtaining an understanding of the accounting and internal control systems to develop an audit plan, the auditor obtains a knowledge of the design of the accounting and internal control
45
systems and their operation. This would enable the auditor measure the quantity of transactions to be audited and design necessary testing procedures. 21. The nature, timing and extent of the procedures performed by the auditor to obtain an understanding of the accounting and internal control systems will vary with, among other things: - The size and complexity of the entity and of its computer system, for example wholly or party computerized application; computers operated separately or in a network,) - Materiality considerations by the auditor and the audit firm; - The type of internal controls involved (for example control of purchases, sales or cash,); - The entitys regulation on respective control procedures (for example, procedures of purchases, sales, and those on goods received and dispatched); - The number of transactions and the entitys documentation of specific internal controls; - The auditors assessment of inherent risk as high or low. 22. Ordinarily, the auditors understanding of the accounting and internal control systems is obtained through: - previous experience with the entity and its operations; - inquiries of appropriate management, supervisory and other personnel at various organizational levels within the entity, together with reference to documentation; - inspection of documents and records produced by the accounting and internal control systems; and - observation of the entitys activities and operations, including observation of the organization of computer operations, management personnel, internal controls and the nature of internal transaction processing. 23. Internal control includes control environment, accounting system and control procedures. Control Environment 24. The auditor should obtain an understanding of the control environment of the entity in evaluating the Boards of Management and Directors attitudes, awareness and actions regarding the internal controls. Key factors reflected in the control environment include: The function of the Boards of Management and Directors and their committees and divisions; The Boards of Management and Directors philosophy and operating style; The entitys organizational structure and the authority and responsibility of the components thereof; - Managements control system including the managing and control structure, internal audit function, personnel policies and procedures segregation of duties; - External impacts, such as Government policies, and higher levels and professional bodies instruction. Accounting System 25. The auditor should obtain an understanding of the accounting system sufficient to identify and understand: - Major classes of transactions in the entitys operations; - How such transactions are initiated; - Organization of the accounting mechanism; - Organization of the accounting practice, including accounting documents, chart of accounts, accounting books and financial reporting; and - The accounting for significant transactions and other events, from their initiation to inclusion in the financial statements.
46
Control Procedures 26. The auditor should obtain an understanding of the control procedures sufficient to develop the audit plan and program. The auditor would consider knowledge of the control environment to define the control procedures in place and those absent that require application (for example in understanding accounting for cash in bank, the auditor would consider whether reconciliation procedures are available and properly performed). Major control procedures are: - drawing up, verifying, reconciling and approving of data and relevant documents; - testing the accuracy of data; - reviewing computerized programs and environment; - comparing data between control account ledgers and sub-ledgers - reviewing and approving of accounting documents; - comparing data between control account ledgers and sub-ledgers; - reviewing and approving of accounting documents; - comparing internal documents to external documents; - reconciling count results to book figures; - limits of access to assets and accounting documents; - comparing actuality to accounting estimates and budgets. When reviewing the control procedures, the auditor should consider whether they have been established upon fundamental principles, such as leadership regime, work assignment, duty segregation, authorization and approval. Control Risks Preliminary Assessment of Control Risks 27. The preliminary assessment of control risk is the process of evaluating the effectiveness of an entitys accounting and internal control systems in preventing or detecting and correcting material misstatements. There will always be some control risk because of the inherent limitations of any accounting and internal control system. 28. After obtaining an understanding of the accounting and internal control systems, the auditor and the audit firm should make a preliminary assessment of control risk, at the assertion level, for each material account balance or class of transactions. 29. The auditor ordinarily assesses control risk at a high level for some or all assertions when: the entitys accounting and internal control systems are not adequate; the entitys accounting and internal control systems would not be efficient; the auditor is not provided with an adequate basis for evaluation of the adequacy and effectiveness of the accounting and internal control systems of the client entity.
30. The assessment of control risk for a financial statement assertion should normally be at less than high if the auditor: - is able to identify internal controls relevant to the assertion which are likely to prevent or detect and correct a material misstatement; and - plans to perform tests of control to support the assessment of control risk. Documentation of Assessment of Control Risks 31. The auditor should document in the audit working papers: - the understanding obtained of the entitys accounting and internal control systems; and - the assessment of control risk. When control risk is assessed at less than high, the auditor would also document the basis for the conclusions.
47
32. Different techniques may be used to document information relating to accounting and internal control systems. The form and extent of this documentation is influenced by the size and complexity of the entity and the nature of the entitys accounting and internal control systems (for example, the more complex the entitys accounting and internal control systems and the more extensive the auditors procedures, the more extensive the auditors documentation will need to be). Tests of Control 33. Tests of control are performed to obtain audit evidence about the effectiveness of the accounting and internal control systems in respect of: - design of the accounting and internal control systems, that is, whether they are suitably designed to prevent or detect and correct material misstatements; and - operation of the accounting and internal control systems throughout the period. 34. Apart from tests of control, the auditor may perform other audit procedures to obtain audit evidence about the effectiveness of the design and operation of the accounting and internal control systems, such as evidence collected through inquiry and observation. 35. When the auditor concludes that procedures provide audit evidence about the effectiveness of the accounting and internal control systems relevant to a particular financial statement assertion, the auditor may use that audit evidence to support a control risk assessment at a low and medium level. 36. Tests of control may include: - Inspection of documents supporting transactions and other events to gain audit evidence that the accounting and internal control systems have operated properly, for example, verifying that payment related documents have been authorized; - Inquiries about, and observation of, the performance of those who carry out internal control assignments to determine whether any audit trails are left; - Reperformance of internal controls, for example, reconciliation of bank accounts, petty cash and inventory count minutes and accounts receivable and payable, to ensure they were correctly performed by the entity. 37. The auditor should obtain audit evidence through tests of control support any assessment of control risk which is less than high. The lower the assessment of control risk, the more support the auditor should obtain that accounting and internal control systems are suitably designed and operating effectively. 38. When obtaining audit evidence about the effective operation of internal controls, the auditor considers how they were applied, the consistency with which they were applied during the period and by whom they were applied. The concept of effective operation recognizes that some deviations may have occurred due to changes in key personnel, significant seasonal fluctuations in volume of transactions and human error. When deviations are detected the auditor makes specific inquiries regarding these matters, particularly the timing of staff changes in key internal control personnel. The auditor then ensures that the tests of control appropriately cover such a period of change or fluctuation. 39. In a computer information systems environment, the objectives of tests of control do not change from those in a manual environment; however, some audit procedures may change. In case the accounting work and internal auditing is performed using computers the auditor may find it necessary, or may prefer, to use computer-assisted audit techniques to collect evidence about the effectiveness of the internal controls.
48
40. Based on the results of the tests of control, the auditor should evaluate whether the internal controls are designed and operating as contemplated in the preliminary assessment of control risk. The evaluation of deviations may result in the auditor concluding that the assessed level of control risk needs to be revised, thus to modify the nature, timing and extent of planned substantive procedures. Final Assessment of Control Risk 41. Before the conclusion of the audit, based on the results of substantive procedures and other audit evidence obtained by the auditor should consider whether the assessment of control risk is confirmed. Relationship Between the Assessments of Inherent and Control Risks 42. Inherent risk and control risk are highly interrelated; and therefore the auditor should assess inherent and control risks together. Detection Risks 43. The level of detection risk relates directly to the auditors substantive procedures. The auditors control risk assessment, together with the inherent risk assessment, influences the nature, timing and extent of substantive procedures to be performed to reduce detection risk, and therefore audit risk, to an acceptably low level. To reduce audit risk to an acceptably low level, the auditor would consider: nature of substantive procedures, for example, using tests directed toward independent parties outside the entity rather than tests directed toward parties or documentation within the entity, or using tests of details for a particular audit objective in addition to analytical procedures; the timing of substantive procedures, for example, performing inventory procedures at period end rather than at an earlier date with adjustment; and the extent of substantive procedures, for example, using a larger sample size. It is impossible however to entirely eliminate the detection risk even when the auditor has checked all the transactions and account balances
44. There is an inverse relationship between detection risk and the combined level of inherent and control risks. For example, when inherent and control risks are high, acceptable detection risk needs to be low to reduce audit risk to an acceptably low level. On the other hand, when inherent and control risks are low, an auditor can accept a higher detection risk and still reduce audit risk to an acceptably low level (see Appendix 01) 45. While tests of control and substantive procedures are distinguishable as to their purpose, the results of either type of procedure may contribute to the purpose of the other regarding assessment of inherent risk and control risk. For example misstatements discovered in conducting substantive procedures may cause the auditor to modify the previous assessment of control risk (see Appendix 01). 46. Regardless of the assessed levels of inherent and control risks, the auditor should perform some substantive procedures for material account balances and classes of transactions. 47. The auditors assessment of the components of audit risk may change during the course of an audit, for example, information may come to the auditors attention when performing substantive procedures that differs significantly from the information on which the auditor originally assessed inherent and control risks. In such cases, the auditor would modify the planned substantive procedures based on a revision of the assessed levels of inherent and control risks. 48. The higher the assessment of inherent and control risk, the more audit evidence the auditor should obtain from the performance of substantive procedures. When the auditor determines that detection risk regarding a financial statement assertion for a material account balance or class of
49
transactions can not be reduced to an acceptable level, the auditor should express a qualified opinion or a disclaimer of opinion. Audit Risk in the Small Business 49. The auditor needs to obtain the same level of assurance in order to express an unqualified opinion on the financial statements of both small and large entities. However, many internal controls which would be relevant to large entities are not practical in the small business. (For example, in large businesses, those involved in the supervisory controls are separate from the accounting staff while in small businesses, accounting procedures may be performed by a few persons. Accountants may take charge of the supervisory controls, and thus the internal controls are impaired). In circumstances where internal controls are limited due to the absence of segregation of duties, the audit evidence necessary to support the auditors opinion on the financial statements may have to be obtained entirely through the performance of substantive procedures. Communication of Weaknesses 50. As a result of obtaining an understanding of the accounting and internal control systems and tests of control, the auditor may become aware of weaknesses in the systems. The auditor should make management aware, as soon as practical and at an appropriate level of responsibility, of material weaknesses in the design or operation of the accounting and internal control systems. Such communication would ordinarily be in writing. However, if oral communication is found appropriate, the communication would be documented in the audit working papers. APPENDIX 01 Interrelationship of the Components of Audit Risk The following table shows how the acceptable level of detection risk may vary based on assessment of inherent and control risks. Auditors assessment of control risk High Medium Lowest Lower Lower Medium Medium Higher Low Medium Higher Highest
Auditors High assessment of Medium inherent risk Low
Notes: - Both inherent risk and control risk are set at three levels: higher, medium and lower. - The shaded areas relate to detection risk. - Detection risk is set at five levels: highest, higher, medium, lower and lowest. There is an inverse relationship between detection risk and the combined level of inherent control risks. For example when inherent risk is assessed as high and control risk is low, acceptable levels of detection risk need to be medium to reduce audit risk to an acceptable low level. On the other hand, when inherent risk is low and control risk is medium, the auditor can accept detection risk as higher and still reduce audit risk to an acceptably low level.
50
Standard No 530- Audit sampling and other selective testing procedures
STANDARD 530 AUDIT SAMPLING AND OTHER SELECTIVE TESTING PROCEDURES (Issued in pursuance of the Minister of Finance Decision No. 143/2001/QD-BTC dated 21 December 2001) GENERAL 1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and fundamental principles and provide guidance on the selection of an audit sample and procedures other to gather audit evidence in an audit of financial statements. When designing audit procedures, the auditor should determine appropriate means for selecting audit sample so as to gather audit evidence to meet the objective of audit testing. This VSA applies to audits of financial statements and also applies to an audit of other financial information and related services rendered by the audit firm. The auditor and the audit firm should comply with this VSA in conducting an audit of financial statements and other related services. Following this standard, the audit firm is to prescribe policies and procedures on audit sampling and other selective procedures for use by its staff. In this VSA, the following terms have the meaning attributed below:
2.
3.
4.
Audit sampling (sampling) means the application of audit procedures to less than 100% of the items with in an account balance or class of transactions such that all sampling units have a chance of selection. This will enable the auditor to obtain and evaluate audit evidence about some characteristic of the items selected in order to form of assist in forming a conclusion concerning the population. Audit sampling can use either a statistical or a non-statistical approach. Deviation means either control deviations, when performing tests of control, or misstatements, when performing substantive procedures. These deviations may be caused intentionally (fraud) or unintentionally (error) by an individual or an organization. Similarly, total deviation is used to mean either the rate of deviation or total misstatement. Anomalous error means an error that arises from an isolated event that has not recurred other than on specifically identifiable occasions and is therefore not representative of errors in the population. Population means the entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions. For example, all of the items in an account balance or a class of transactions constitute a population. A population may be divided into strata, or subpopulations, with each stratum being examined separately. The term population is used to include the term stratum.
5.
6.
7.
8.
Sampling risk arises from the possibility that the auditors conclusion, based on a sample, may be different from the conclusion reached if the entire population were subjected to the same audit procedure. There are two types of sampling risk: (a) the risk the auditor will conclude, in the case of a test of control, that control risk is lower than it actually is, or in the case of a substantive test, that a material error does not exist when in fact it does. This type of risk affects audit effectiveness and is more likely to lead to an inappropriate audit opinion; and
51
(b) the risk the auditor will conclude, in the case of a test of control, that control risk is higher than it actually is, or in the case of substantive test, that a material error exists when in fact it does not. This type of risk affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect.
9.
Non-sampling risk arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related to the size of the sample. For example, the auditor might use inappropriate procedures, or the auditor might misinterpret evidence and fail to recognize an error. on deposit slips, credit entries on bank statements, sales invoices or debtors balances. Form of sampling unit could be either a monetary unit, quantity or a physical thing.
10. Sampling unit means the individual items constituting a population, for example checks listed
11. Statistical sampling means any approach to sampling that has the following two
characteristics: (a) random selection of a sample; and (b) use of probability-statistical theory to evaluate sample results, including measurement of sampling risk. Non-statistical sampling is a sampling approach that does not have either or both of the above characteristics.
12. Stratification is the division of a population into sub-populations, each of which is a group of
sampling units with similar characteristics (often monetary value).
13. Tolerable error means the maximum error in a population that the auditor and audit firm are
willing to accept. Tolerable error is normally immaterial. CONTENT OF THE VSA Audit Evidence 14. In accordance with VSA 500 Audit Evidence, audit evidence is obtained from an appropriate mix of tests of control and substantive procedures. Tests of Control 15. In accordance with VSA 400 Risk Assessments and Internal Control tests of control are performed if the auditor plans to assess control risk less than high for a particular assertion. 16. Based on the auditors understanding of the accounting and internal control systems, the auditor identifies the characteristics or attributes that indicate performance of a control, as well as possible deviation conditions which indicate departures from adequate performance. The presence or absence of attributes can then be tested by the auditor. 17. Audit sampling for tests of control is generally appropriate when application of the control leaves evidence of performance (for example, initials of the credit manager on a sales invoice indicating credit approval, or evidence of authorization of data input to a micro-computer based data processing system). Substantive Procedures 18. Substantive procedures are of two types: analytical procedures and tests of details of transactions and balances. Substantive procedures are only relevant to monetary value. The
52
purpose of substantive procedures is to obtain audit evidence to detect material misstatements in the financial statements. When performing substantive tests of details, audit sampling and other means may be used to verify one or more assertions about a financial statement amount (for example, the existence of accounts receivable), or to make an independent estimate of some amount (for example, the value of obsolete inventories). Risk Considerations in Obtaining Evidence 19. In obtaining evidence, the auditor should use professional judgment to assess audit risk and design audit procedures to ensure this risk is reduced to an acceptably low level. 20. Audit risk: means the risk that the auditor and the audit firm give an inappropriate audit opinion when the financial statements are materially misstated. Audit risk has three components: inherent risk, control risk and detection risk. Inherent risk is the susceptibility of an account balance or class of transactions to misstatement that could be material individually or when aggregated with misstatements in other balances or classes, assuming that there were no related internal controls. Control risk is the risk that a misstatement that could occur in an account balance or class of transactions and that could be material individually or when aggregated with misstatement in other balances or classes will not be prevented or detected and corrected on a timely basis by the accounting and internal control systems. Detection risk is the risk that misstatement exists in an account balance or class of transactions that could be material individually or when aggregated with misstatements in other balances or classes that the auditor and the audit firm fail to detect. These three components of audit risk are considered during the planning process in the design of audit procedures in order to reduce audit risk to an accept ably low level. 21. Sampling risk and non-sampling risk can affect the components of audit risk. For example, when performing tests of control, the auditor may find no errors in a sample and conclude that control risk is low, when the rate of error in the population is, in fact, unacceptably high (sampling risk). Or there may be errors in the sample which the auditor fails to recognize (non-sampling risk). With respect to substantive procedures, the auditor may use a variety of methods to reduce detection risk to an acceptable level. Depending on their nature, these methods will be subject to sampling and/or non-sampling risks. For example, the auditor may choose an inappropriate analytical procedure (non-sampling risk) or may find only minor misstatements in a test of details when, in fact, the population misstatement is greater than the tolerable amount (sampling risk). For both tests of control and substantive tests, sampling risk can be reduced by increasing sample size, while non-sampling risk can be reduced by proper engagement planning, supervision, and review. Procedures for Obtaining Evidence 22. Procedures for obtaining audit evidence include inspection, observation, inquiry and confirmation, computation and analytical procedures. The choice of appropriate procedures is a matter of professional judgment in the circumstances. Application of these procedures will often involve the selection of items for testing from a population. Selecting Items for Testing to Gather Audit Evidence 23. When designing audit procedures, the auditor should determine appropriate means of selecting items for testing. The means available to the auditor are:
53
(a) Selecting all items (100% examination); (b) Selecting specific items, and (c) Audit sampling. 24. The application of any one or combination of the above means may be appropriate in particular circumstances. The decision as to which approach to use will depend on assessment of audit risk and the effectiveness of an audit. The auditor needs to be satisfied that methods used are effective in providing sufficient appropriate audit evidence to meet the objectives of the test. Selecting All Items (100% examination) 25. The auditor may decide that it will be most a appropriate to examine the entire population of items that make up an account balance or class of transactions (or a stratum within that population). Selecting all items is unlikely in the case of tests of control; however, it is more common for substantive procedures. For example, 100% examination may be appropriate when: - the population constitutes a small number of large value items; - both inherent and control risks are high and other means do not provide sufficient appropriate audit evidence; - the repetitive nature of a calculation or other process performed by a computer information system makes selecting all items cost effective; - there is probable indication of dispute or law suit; - the client requires. Select Specific Items 26. The auditor may decide to select specific items from a population based on such factors as knowledge of the clients business, preliminary assessments of inherent and control risks, and the characteristics of the population being tested. The judgmental selection of specific items is subject to non-sampling risk. Specific items selected may include: High value or key items. The auditor may decide to select specific items within a population because they are of high value, or exhibit some other characteristic, for example items that are suspicious, unusual, particularly risk-prone or that have a history of error. All items over a certain amount. The auditor may decide to examine items whose values exceed a certain amount so as to verify a large proportion of the total amount of an account balance or class of transactions. Items to obtain information. The auditor may examine items to obtain information about matters such as the clients business, the nature of transactions, accounting and internal control systems. Items to test procedures. The auditor may use judgment to select and examine specific items to determine whether or not a particular control procedure is being performed. 27. While selective examination of specific items from an account balance or class of transactions will often be an efficient means of gathering audit evidence, it does not constitute audit sampling. The results of procedures applied to items selected in this way cannot be projected to the entire population. The auditor considers the need to obtain appropriate evidence regarding the remainder of the population when that remainder is material. Audit Sampling
54
28. The auditor may decide to apply audit sampling to an account balance or class of transactions. Audit sampling can be applied using either non-statistical or statistical sampling methods. Audit sampling is discussed in detail in paragraphs 29 through 56. Statistical Versus Non-Statistical Sampling Approaches 29. The decision whether to use a statistical or non-statistical sampling approach is a matter for the auditors judgment regarding the most efficient manner to obtain sufficient appropriate audit evidence in the particular circumstances. For example, in the case of tests of control the auditors analysis of the nature and cause of errors will often be more important than the statistical analysis of the mere frequency of errors. In such a situation, non-statistical sampling may be most appropriate. 30. When applying statistical sampling, the sample size can be determined using either probability theory or professional judgment. Moreover, sample size is not a valid criterion to distinguish between statistical and non-statistical approaches. Sample size is a function of factors such as those identified in Appendices 1 and 2. When circumstances are similar, the effect on sample size of factors will be similar regardless of whether a statistical or nonstatistical approach is chosen. (see Appendices 01 and 02). 31. When applying non-statistical sampling, the auditor can still use elements of a statistical approach, for example the use of random selection using computer generated random numbers. However, only when the approach adopted has the characteristics of statistical sampling statistical measurements of sampling risk are valid. Design of the Sample 32. When designing an audit sample, the auditor should consider the objectives of the test and the attributes of the population from which the sample will be drawn. 33. The auditor first considers the specific objectives to be achieved and the combination of audit procedures which is likely to best achieve those objectives. Consideration of the nature of the audit evidence sought and possible error conditions or other characteristics relating to that audit evidence will assist the auditor in defining what constitutes an error and what population to use for sampling. 34. The auditor considers what conditions constitute an error by reference to the objectives of the test. A clear understanding of what constitutes an error is important for projecting and arriving at a conclusion of errors. For example, (1) in a substantive procedure relating to the existence of accounts receivable, if payments are made by the customer before the confirmation date but received shortly after that date by the client the case is not considered an error. (2) A misposting between customer accounts that does not affect the total accounts receivable balance is an error, but should not be seen as material. 35. When performing tests of control, the auditor generally makes a preliminary assessment of the rate of error the auditor expects to find in the population to be tested and the level of control risk. This assessment is based on the auditors prior knowledge or the examination of a small number of items from the population. Similarly, for substantive tests, the auditor generally makes a preliminary assessment of the amount of error in the population. These preliminary assessments are useful for designing an audit sample and in determining sample size. For example, if the expected rate of error is unacceptably high, selecting all items Population 36. It is important for the auditor to ensure that the population should be appropriate and complete:
55
(a) Appropriate: population should be appropriate to the objective of the sampling procedure. For example, if the auditors objective is to test for overstatement of accounts payable listing. On the other hand, when testing for understatement of accounts payable, the population is not the accounts payable listing but rather subsequent disbursements, unpaid invoices, suppliers statements, unmatched receiving reports or other populations that provide audit evidence of understatement of accounts payable; and (b) Complete: population should be complete. For example, if the auditor intends to select payment vouchers from a file, the auditor should be satisfied that all vouches have in fact been filed. Similarly, if the auditor intends to use sample to draw conclusions about the operation of an accounting and internal control system during the financial reporting period, the population needs to include all relevant items from the entire period. A different approach may be to stratify the population and use sampling only to draw conclusions about the control during a certain period of time, (for example, the first 9 months of a year), and to use alternative procedures or a separate sample regarding the remaining time (three months). In this case, the population does not need to be complete. Stratification 37. Audit efficiency may be improved if the auditor stratifies a population by dividing it into discrete sub-populations of similar characteristics. The objective of stratification is to reduce the variability of items within each stratum and therefore allow sample size to be reduced without a proportional increase in sampling risk. Sub-populations need to be carefully defined such that any sampling unit can only belong to one stratum. 38. When performing substantive procedures, an account balance or class of transactions is often stratified by monetary value. This allows greater audit effort to be directed to the larger value items which may contain the greater potential monetary error in terms of overstatement. Similarly, a population may be stratified according to a particular characteristic that indicates a higher risk of error, for example, when testing the valuation of accounts receivable, balances may be stratified by age. 39. The results of procedures applied to a sample of items within a stratum can only be projected to the items that make up that stratum. To draw a conclusion on the entire population, the auditor will need to consider risk and materiality in relation to whatever other strata that make up the entire population. For example, 20% of the items in a population may make up 90% of the value of an account balance. The auditor may decide to examine a sample of these items. The auditor evaluates the results of this sample and reaches a conclusion on the 90% of value separately from the remaining 10%. On this remaining, a further sample or other means of gathering evidence will be used, or which may be considered immaterial. Value weighted selection 40. It will often be efficient in substantive testing, particularly when testing for overstatements Under this method, the sampling unit is identified as an individual monetary value (e.g.VND 10 million) of the units that make up an account balance or class of transactions. Having selected specific monetary units from within the population, the auditor then examines the particular items that contain those are equal or higher the monetary units. This approach to defining the sampling unit ensures that audit effort is directed to the larger value items and can result in smaller sample sizes. This approach is ordinarily used in conjunction with the systematic method of sample selection (see Appendix 03) and is most efficient when selecting from computerized database. Sample Size
56
41. In determining the sample size, the auditor should consider whether sampling risk is reduced to an acceptably low level. Sample size is affected by the level of sampling risk that the auditor is willing to accept. The lower the risk the auditor is willing to accept, the greater the sample size will need to be. 42. The sample size can be determined by the application of a statistically-based formula or through the exercise of professional judgment objectively applied to the circumstances. Appendices 01 and 02 indicated the influences that various factors typically have on the determination of sample sized in tests of control and substantive procedures. Selecting the Sample Items 43. The auditor should select items for the sample with the expectation that all sampling units in the population have a chance of selection. Statistical sampling requires that sample items are selected at random so that each sampling unit has a known chance of being selected. The sampling units might be physical items (such as invoices) or monetary units. With nonstatistical sampling, an auditor uses professional judgment to select the items for a sample. Because the purpose of sampling is to draw conclusions about the entire population, the auditor endeavors to select a representative sample by choosing sample items which have characteristics typical of the population, and the sample needs to be selected so that bias is avoided. 44. The principal methods of selecting samples are the use of random number tables or computer programs, systematic selection and haphazard selection. Each of these methods is discussed in Appendix 03. Performing the Audit Procedure 45. The auditor should perform audit procedures appropriate to the particular test objective on each item selected. 46. If a selected item is not appropriate for the application of the procedure, the procedure is ordinarily performed on a replacement item. For example, a voided check may be selected when testing for evidence of payment authorization. If the auditor is satisfied that the check had been properly voided such that it does not constitute an error, an appropriately chosen replacement is examined. 47. When the auditor is unable to apply the planned audit procedures to a selected item because, for instance, documentation relating to that item has been lost and suitable alternative procedures cannot be performed on that item, the auditor ordinarily considers that item to be error. Nature and Cause of Errors 48. The auditor should consider the sample results, the nature and cause of any errors identified, and their possible effect on the particular test objective and on other areas of the audit. 49. In analyzing the errors discovered, the auditor may observe that many have a common feature, for example, as to transactions, locations, products or period of time. In such circumstances, the auditor may decide to identify all items in the population that possess the common feature, and extend audit procedures in that stratum. Such errors may be intentional, and may indicate the possibility of fraud.
57
50. Sometimes, the auditor may be able to establish that an error arises from an isolated event that has not recurred other than on specifically identifiable occasions and is therefore not representative of similar errors in the population (an anomalous error). For error to be considered an anomalous error, not representative of the population, the auditor should perform additional work. The additional work depends on the situation, but is adequate to provide the auditor with sufficient appropriate evidence that the error does not affect the remaining part of the population. (1) One example is an error caused by a computer breakdown that is known to have occurred on only one day during the period. In that case, the auditor assesses the effect of the breakdown, for example by examining specific transactions processed on that day, and considers the effect of the cause of the break-down on audit procedures and conclusions. (2) Another example is an error that is found to be caused by use of an error that is found to be caused by use of an incorrect formula in calculating all inventory values at one particular branch. To establish that this is an anomalous error, the auditor needs to ensure the correct formula has been used at other branches. Projecting Errors 51. When performing substantive procedures, the auditor should project monetary errors found in the sample to the population, and should consider the effect of the projected error on the particular test objective and on other areas of the audit. The auditor projects the total error for the population to obtain a broad view of the scale of errors, and to compare this to the tolerable error. For substantive procedures, tolerable error is the tolerable misstatement, and will be an amount less than or equal to the auditors preliminary estimate of materiality used for the individual account balances being audited. 52. When an error has been established as an anomalous error, it may be excluded when projecting sample errors to the population. The effect of any such error, if uncorrected, still needs to be considered in addition to the projection of the non-anomalous errors. If an account balance or class of transactions has been divided into strata, the error is projected for each stratum separately. Projected errors plus anomalous errors for each stratum are then combined when considering the possible effect of errors on the total account balance or class of transactions. 53. For tests of control, no explicit projection of errors is necessary since the sample error rate is also the projected rate of error for the population as a whole. Evaluating the Sample Results 54. The auditor should evaluate the sample results to confirm the populations appropriateness and completeness or to decide whether to revise the preliminary assessment thereof. In the case of a test of control, an unexpectedly high sample error rate may lead to an increase in the assessed level of control risk, unless further evidence substantiating the initial assessment is obtained. In the case of a substantive procedure, an unexpectedly high error amount in a sample may cause the auditor to believe that an account balance or class of transactions is materially misstated, in the absence of further evidence that no material misstatement exists. 55. If the total amount of projected error plus (+) anomalous error is less than but close to that which the auditor deems tolerable, the auditor considers the persuasiveness of the sample results in the light of other audit procedures, and may consider it appropriate to obtain additional audit evidence. The total of projected error plus (+) anomalous error is the auditors best estimate of error in the population. However, sampling results are affected by sampling risk. Thus when the best estimate of error plus (+) anomalous error is close to the tolerable error, the auditor recognizes the risk that a different sample would result in a different best estimate that could exceed the tolerable error. Considering the results of other
58
audit procedures helps the auditor to assess this risk, while the risk is reduced if additional audit evidence is obtained. 56. If the evaluation of sample results indicates that the preliminary assessment of the relevant characteristic of the population needs to be revised, the auditor may: (a) request the clients management to investigate identified errors and the potential for further errors, and to make any necessary adjustments; (b) modify planned audit procedures. For example, in the case of a test of control, the auditor might extend the sample size, test an alternative control or modify related substantive procedures; (c) consider the effect on the audit report. APPENDIX 1: Examples of Factors Influencing Sample Size for Tests of Control The following are factors that the auditor considers when determining the sample size for a test of control. These factors need to be considered together and should never be separated: FACTOR 1. An increase in the auditors intended reliance on accounting and internal control systems 2. An increase in the rate of deviation from the prescribed control procedure that the auditor is willing to accept 3. An increase in the rate of deviation from the prescribed control procedure that the auditor expects to find in the population 4. A decrease in the risk that the auditor will conclude that the control risk is lower than the actual control risk. 5. An increase in the number of sampling units in the population EFFECT ON SAMPLE SIZE Increase Decrease Increase Increase Negligible effect
1. The auditors intended reliance on accounting and internal control systems: The more assurance the auditor intends to obtain from accounting and internal control systems, the lower the auditors assessment of control risk will be, and the large the sample size will need to be. For example, a preliminary assessment of control risk as low indicates that the auditor plans to place considerable reliance on the effective operation of particular internal controls. Te auditor therefore needs to gather more audit evidence to support this assessment than would be the case if control risk were assessed at a higher level. 2. The rate of deviation from the prescribed control procedure the auditor is willing to accept (tolerable error): The lower the rate of deviation that the auditor is willing to accept, the larger the sample size needs to be. 3. The rate of deviation from the prescribed control procedure the auditor expects to find in the population: The higher the rate of deviation that the auditor expects, the larger the sample size needs to be. Factors relevant to the auditors consideration of the expected error rate include the auditors understanding of the business (in particular, procedures undertaken to obtain an understanding of the accounting and internal control systems), changes in personnel or in the accounting and internal control systems, the results of audit procedures applied in prior periods and the results of other audit procedures applied for the current period. High expected error rates ordinarily warrant little, if any, reduction of control risk, and therefore in such circumstances tests of controls would ordinarily be omitted.
59
4. The auditors conclusion of control risk as lower than it is: The greater the degree of confidence that the auditor requires that the results of the sample are in fact indicative of the actual incidence of error in the population, the larger the sample size needs to be. 5. The number of sampling units in the population. For large populations, the actual size of the population has little, if any, effect on sample size. For small populations however, audit sampling is often not as efficient as alternative means of obtaining sufficient appropriate audit evidence.
APPENDIX 2 Examples of Factors Influencing Sample Size for Substantive Procedures The following are factors that the auditor considers when determining the sample size for a substantive procedure. FACTOR EFFECT ON SAMPLE SIZE
1. An increase in the auditors assessment Increase of inherent risk 2. An increase in the auditors assessment Increase of control risk 3. An increase in the use of other Decrease substantive procedures directed at the same financial statement assertion 4. The risk that the auditor will conclude that a material error does not exist, when in fact it does exist. 5. An increase in the total error that the auditor is willing to accept (tolerable error) 6. An increase in the amount of error the auditor expects to find in the population 7. Stratification of the population when appropriate 8. The number of sampling units in the population Increase Decrease Increase Decrease Negligible Effect
1. The auditors assessment of inherent risk: The higher the auditors assessment of inherent risk, the larger the sample size needs to be. Higher inherent risk implies that a lower detection risk is needed to reduce the audit risk to an acceptable low level, thus increasing sample size. 2. The auditors assessment of control risk. The higher the auditors assessment of control risk, the larger the sample size needs to be. For example, an assessment of control risk as high indicates that auditor cannot place much reliance on the effective operation of internal controls with respect to the particular financial statement assertion. Therefore, in order to reduce audit risk to an acceptably low level, the auditor needs a low detection risk and will rely more on substantive tests. The more reliance that is placed on substantive tests, the larger the sample size will need to be. 3. The use of other substantive procedures directed at the same financial statement assertion. The more the auditor is relying on other substantive procedures (test of detail or
60
analytical procedures) to reduce detection risk to an acceptable level, the less assurance the auditor will require from sampling and, therefore, the smaller the sample size can be. 4. The auditors conclusion that a material error does not exist when in fact it does exist: The greater the degree of confidence that the auditor requires that the results of the sample are in fact indicative of the actual amount of error in the population, the larger the sample size needs to be. 5. The total error the auditor is willing to accept (tolerable error). The lower the total error that the auditor is willing to accept, the larger the sample size needs to be. 6. The amount of error the auditor expects to find in the population: The greater the amount of error the auditor expects to find in the population, the larger the sample size needs to be in order to make a reasonable estimate of the actual amount of error in the population. Factors relevant to the auditors consideration of the expected error amount include the extent to which item values are determined subjectively, the results of tests of control, the results of audit procedures applied in prior periods, and the results of other substantive procedures applied in the current period. 7. Stratification when there is a wide range in the monetary size of items in the population: It may be useful to group items of similar size into separate sub-populations or strata. When a population can be appropriately stratified, the aggregate of the sample sizes from the strata generally will be less than the sample size applied to the whole population notwithstanding sampling risk being unchanged. 8. The number of sampling units in the population. For large populations, the actual size of the population has little, if any, effect on sample size. Thus, for small populations, audit sampling is often not as efficient as alternative means of obtaining sufficient appropriate audit evidence. APPENDIX 3 Sample Selection Methods The principal methods of selecting samples are: (a) Use of a computerized random number generator or random number tables. (b) Systematic selection, in which the number of sampling units in the population is divided by the sample size to give a sampling interval (for example for a population of 10,000 and the necessary sampling size of 200, the intervals would be 50). Having determined a starting point within the first 50, each 50th sampling unit thereafter is selected. Given that the starting point is 23, the items selected would be 23, 73, 123 and so forth. When using systematic selection, the auditor would need to determine that sampling units within the population are not structured in such a way that the sampling interval corresponds with a particular pattern in the population. (c) Haphazard selection, in which the auditor selects the sample without following a structured technique and would nonetheless avoid any conscious bias or predictability (for example avoiding difficult to locate items, or always choosing or avoiding the first or last entries on a page) and thus attempt to ensure that all items in the population have a chance of selection. Haphazard selection is not appropriate when using statistical sampling. Block selection involves selecting a block (s) of contiguous items from within the population. Block selection cannot ordinarily be used in audit sampling because most populations are structured such that items in a sequence can be expected to have similar characteristics in the population. Although in some circumstances it may be an appropriate audit procedure to examine a block of items, it would rarely be an appropriate sample selection technique when the auditor intends to draw valid inferences about the entire population based on the sample.
61
Standard No 540- Audit of accounting estimates
STANDARD 540 AUDIT OF ACCOUNTING ESTIMATES (Issued in pursuance of the Minister of Finance Decision No. 143/2001/QD-BTC dated 21 December 2001) GENERAL 1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and fundamental principles and provide guidance on the audit of accounting estimates contained in financial statements. 2. The auditor should obtain sufficient appropriate audit evidence regarding accounting estimates. 3. This VSA applies to audits of accounting estimates contained in financial statements; it does not apply to verification of financial estimates (plans) of the entity. The auditor and the audit firm should comply with this VSA in auditing accounting estimates contained in financial statements. In this VSA, the following terms have the meaning attributed below: 4. Accounting estimate means an approximation of the amount of an item in the financial statements which either has occurred in the absence of a precise means of measurement, or is likely to occur but already estimated for financial reporting. Examples are: * Estimates of items that have occurred: - Allowance for bad debts - Allowance for long-term investment dimunition - Provision for stock items devaluation - Provisions of depreciation of fixed assets. - Prepaid expenses - Estimates of work-in-process - Accrued revenue - Revenue of construction in progress. * Estimates of items likely to occur: - Provision to meet warranty claims. - Estimates of accrued expenses 5. The Director (or leader) of the entity is responsible for accounting estimates included in the financial statements. These estimates are often made in conditions of uncertainty regarding the outcome of events that have occurred or are likely to occur and involve the use of judgment. As a result, the risk of material misstatement is greater when accounting estimates are involved. CONTENT OF THE VSA Nature of Accounting Estimates 6. The determination of an accounting estimate may be simple or complex depending upon the nature of the item. For example, accruing a charge for rent may be a simple calculation, whereas estimating a provision for slow-moving inventory may involve considerable analyses of current data and a forecast of future sales. In complex estimates, there may be a high degree of special knowledge and judgment required. 7. Accounting estimates may be determined as part of the routine accounting system operating on a continuing basis, or may be nonroutine, operating only at period end. In many cases, accounting
62
estimates are made by using a formula based on experience, such as the use of standard percentage of sales revenue for computing a warranty provision. In such cases, the formula needs to be reviewed regularly by management by comparing actual results with the estimate and adjusting the formula when necessary. 8. The uncertainty associated with an item, or the lack of objective data may make it incapable of reasonable estimation, in which case, the auditor needs to consider whether the auditors report needs modification to comply with VSA 700 The Auditors Report on Financial Statements. Audit Procedures 9. Accounting estimates will often be related directly to the operating results and tax obligations to the State. Therefore, they may be made in accordance with managements subjective judgments, so as to create a better view for the company. The auditor and the audit firm should obtain sufficient appropriate audit evidence as to whether an accounting estimates is reasonable in the circumstances and, when required, information relevant to accounting estimates is appropriately disclosed in the notes to the financial statements. The evidence available to support an accounting estimate will often be more difficult to obtain and less conclusive than evidence available to support other items in the financial statements. 10. An understanding of the procedures and methods, including the accounting and internal control systems, used by management in making the accounting estimates is often important for the auditor to plan the nature, timing and extent of the audit procedures. 11. The auditor should adopt one or a combination of the following approaches in the audit of an accounting estimate: (a) review and test the process used by management to develop the estimate; (b) use an independent estimate for comparison with that prepared by management; or (c) review events subsequent to the closing date but prior to the date of the audit report which confirm the estimate made. Reviewing and Testing the Process Used by Management 12. The steps ordinarily involved in reviewing and testing of the process used by management are: (a) evaluation of the data and consideration of assumptions on which the estimate is based; comparison of the data or assumptions to the prevailing regulations or to the practical experience of similar entities in the industry or the locality. (b) Testing of the calculations involved in the estimate; (c) Comparison, when possible, of estimates made for prior periods with actual results of those periods; and (d) Consideration of managements approval procedures. Evaluation of Data and Consideration of Assumptions 13. The auditor would evaluate whether the data on which the estimate is based is accurate, complete and relevant. When accounting data is used, it will need to be consistent with the data processed through the accounting system. For example, in substantiating a warranty provision, the auditor would obtain audit evidence that the data relating to products still within the warranty period at period end agree with the sales information within the accounting system. 14. The auditor may also seek evidence from sources outside the entity. For example, when examining a provision for inventory obsolescence calculated by reference to anticipated future sales, the auditor may, in addition to examining internal data (such as past levels of sales, orders on hand and marketing trends), seek evidence from industry-proceduced sales projections and market
63
analyses. Similarly, when examining managements estimates of the financial implications of litigation and claims, the auditor would seek direct communication with the entitys lawyers. 15. The auditor would evaluate whether the data collected is appropriately analyzed and projected to form a reasonable basis for determining the accounting estimate. Examples are the analysis of the age of accounts receivable and the projection of the number of months of supply on hand of an item of inventory based on past and forecast usage. 16. The auditor would evaluate whether the entity has an appropriate base for the principal assumptions used in the accounting estimate. In some cases, the assumptions will be based on industry or government statistics, such as future inflation rates, interest rates, and growth rates. In other cases, the assumptions will be based on internally generated data. 17. In evaluating the assumptions on which estimate is based, the auditor would consider, among other things, whether they are: - Reasonable in light of actual results in prior periods. - Consistent with those used for other accounting estimates. - Consistent with managements plans which appear appropriate. The auditor would need to pay particular attention to assumptions which are sensitive to variation, subjective or susceptible to material misstatement. 18. In the case of complex estimating processes involving specialized techniques, it may be necessary for the auditor to use the work of an expert, for example, engineers for estimating quantities in stock piles of mineral ores. 19. The auditor would review the continuing appropriateness of formulae used by management in the preparation of accounting estimates. Such a review would reflect the auditors knowledge of the financial results of the entity in prior periods, practices used by other entities in the industry and the future plans of management as disclosed to the auditor. 20. For data and assumptions that have been stated in legal documents (i.e. useful lives over which fixed assets are to be depreciated), the auditor needs to relate such regulations to the assumptions used by the entity to develop accounting estimates. Testing of Calculations 21. The auditor would test the calculation procedures used by management. The nature, timing and extent of the auditors testing will depend on such factors as the complexity involved in calculating the accounting estimate, the auditors evaluation of the procedures and methods used by entity in producing the estimate and the materiality of the estimate in the context of the financial statements. Comparison of Previous Estimates with Actual Results 22. When given, access to the accounting books of the prior periods, the auditor would compare the accounting estimates made therefore with actual results of those periods to assist in: (a) obtaining evidence about the general reliability of the entitys estimating procedures; (b) considering whether adjustments to estimating formulae may be required; and (c) evaluating whether differences between actual results and previous estimates have been quantified and that, where necessary, appropriate adjustments or disclosures have been made to the notes to the financials statements. Consideration of Managements Approval Procedures 23. Material accounting estimates are ordinarily reviewed and approved by the Director (or leader) of the entity. The auditor would consider whether such review and approval is performed by
64
the appropriate level of management and that it is evidenced in the documentation supporting the determination of the accounting estimate. Use of an Independent Estimate 24. The auditor may make or obtain an independent estimate and compare it with the accounting estimate prepared by management. When using an independent estimate the auditor would ordinarily evaluate the data, consider the assumptions and test the calculation procedures used in its development. It may also be appropriate to compare accounting estimates made for prior periods with actual results of those periods. Review of Subsequent Events 25. Transactions and events which occur after period end, but prior to completion of the audit, may provide audit evidence regarding an accounting estimate made by management. The auditors review of such transactions and events may reduce, or even remove, the need for the auditor to review and test the process used by management develop the accounting estimate or to use an independent estimate in assessing the reasonableness of the accounting estimate. Evaluation of Results of Audit Procedures 26. The auditor should make a final assessment of the reasonableness of the estimate based on the auditors knowledge of the business and whether the estimate is consistent with other audit evidence obtained during the audit. 27. The auditor would consider whether there are any significant subsequent transactions or events which affect the data and the assumptions used in making the accounting estimate. 28. Because of the uncertainties inherent in accounting estimates, evaluating difference can be more difficult than in other areas of the audit. When there is a difference between the auditors estimate of the amount best supported by the available audit evidence and the estimated amount included in the financial statements, the auditor would determine whether such a difference requires adjustment. If the difference is reasonable or immaterial, it may not require adjustment. However, if the auditor believes the difference is unreasonable or could give material impact on the financial statements, management would be requested to revise the estimate. If management refuses to revise the estimate, the difference would be considered a misstatement and would be considered with all other misstatements in assessing whether the effect on the financial statements is material. 29. The auditor would also consider whether individual differences which have been accepted as reasonable are biased in one direction, so that, on a cumulative basis, they may have a material effect on the financial statements. In such circumstances, the auditor would evaluate the accounting estimates taken as a whole.
65
Standard No 610 Considering the work of internal auditing
STANDARD 610 CONSIDERING THE WORK OF INTERNAL AUDITING (Issued in pursuance of the Minister of Finance Decision No. 143/2001/QD-BTC dated 21 December 2001) GENERAL 1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and fundamental principles and provide guidance to external auditors and the audit firm on considering the work of internal auditing when auditing financial statements. This VSA does not deal with instances when personnel from internal auditing assist the external auditor in carrying out external audit procedures. 2. The external auditor should consider the activities of internal auditing and their effect, if any, on external audit procedures. 3. This VSA applies to the auditors and the audit firms in using the work of internal audit to support audit of the financial statements, and also applies to an audit of other financial information and related services rendered by the audit firm. The external auditor can use the work of internal auditing to support his/her audit of the financial statements, but holds responsibility for the nature, timing and extent of the audit and for the opinion expressed on the audited financial statements. Internal auditors and the entity under audit are expected to possess essential knowledge on the principles and procedures prescribed in this VSA in exercising their responsibility for providing documents and information to and joining work with the external auditor in auditing the financial statements. In this VSA, the following terms have the meaning attributed below: 4. Internal auditing is part of internal controls established within an entity with the functions of examining and evaluating the adequacy and effectiveness of the accounting and internal control systems, and consideration of compliance with law and regulations. CONTENT OF THE VSA Scope and Objective of Internal Auditing 5. The scope and objective of internal auditing vary widely and depend on the size and structure of the entity and the requirements of its management. Ordinarily, internal auditing activities include one or more of the following: Review of the relevance, effectiveness and efficiency of accounting and internal control systems. The establishment of adequate accounting and internal control systems is a responsibility of management which demands proper attention on a continuous basis. Internal auditing is ordinarily assigned specific responsibility for reviewing these systems, monitoring their operation and recommending improvements thereto. - Examination and assessment of the quality and reliability of financial and operating information in the financial statements and managerial accounting reports. This may include review of the means used to identify, measure, classify and report such information and specific inquiry into individual items including detailed testing of transactions, balances and procedures. - Review of the profitability, efficiency and effectiveness of operations including non-financial activities of an entity, identification of weaknesses and loopholes, and recommendation for improvement.
66
- Review of compliance with laws, regulations and other external requirements and with management policies and other internal requirements. Relationship Between Internal Auditing and the External Auditor 6. The role of internal auditing is determined by the Director (or leader) of the entity and subject to change as required by management over time. An external auditing objective is to report independently and objectively on the financial statements with primary concern as to whether the financial statements are free of material misstatements. In achieving the objectives, external and internal audits would often apply similar approaches and procedures; certain aspects of internal auditing may be useful to external auditors in determining the nature, timing and extent of external audit procedures. 7. Internal auditing opinions on the financial statements cannot achieve the same degree of independence as required of that of the external auditor. The external auditor has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by any use of the work of internal auditing. Understanding and Preliminary Assessment of Internal Auditing 8. The external auditor should obtain a sufficient understanding of internal audit activities to assist in planning the audit and developing an effective audit approach. 9. Effective internal auditing will often allow a modification in the nature and timing, and a reduction in the extent of procedures performed by the external auditor but cannot eliminate them entirely. In some cases, however, having considered the activities of internal auditing, the external auditor may decide that internal auditing will have no effect on external audit procedures. 10. During the course of planning the audit, the external auditor should perform a preliminary assessment of the internal audit function when it appears that internal auditing is relevant to the external audit of the financial statements in specific audit areas. 11. The external auditors preliminary assessment of the internal audit function will influence the external auditors judgment about the use of the work of internal auditing in modifying the nature, timing and extent of external audit procedures. 12. A preliminary assessment of the internal audit function is based on the important criteria below: (a) Organizational Status of Internal Auditing The external auditor should consider the status of internal in the entity and the effect it has on its ability to be independent and objective. Independence and objectiveness of internal auditing should be insured when internal auditing has the rights to (1) reporting to the highest level of management, (2) being free of any other operating responsibility and (3) being free to communicate fully with the external auditor. (b) Scope of Function The external auditor would assess internal auditing assignments performed, and consider managements attitude and acts on internal audit recommendations. (c) Technical Competence of Internal Auditors The external auditor would consider technical training, professional qualifications and experience of internal auditing and review the policies for hiring and training the internal auditing staff. (d) Due Professional Care The external auditor would consider whether internal auditing is properly planned, supervised, reviewed and documented. The external auditor would also consider the existence of adequate audit manuals, work programs and working papers of internal auditing. (e) Activities and Efficiency of Internal Auditing in Prior Years
67
The external auditor need to consider the performance and the efficiency of internal auditor in prior years. The consideration should cover the extent of work performed; the ability of identifying and detecting fraud and error; and internal auditing report. Liaison and Coordination 13. When planning to use the work of internal auditing, the external auditor will need to consider internal auditings tentative plan for the period and discuss it at as early a stage as possible. Where the work of internal auditing is to be a factor in determining the nature, timing and extent of the external auditors procedures, it is desirable to agree in advance the timing of such work, the extent of audit coverage, test levels and proposed methods of sample selection, documentation of the work performed and review and reporting procedures. 14. Liaison with internal auditing should be held at appropriate intervals during the period. Either auditor should be kept informed by the other of any significant matter which may affect the work of the two. The external auditor has the rights to access to internal auditing documentation. In case of the internal auditors refusal to coordinate, the external auditor also has the rights to deal with the case as a limitation on the audit scope. Evaluating and Testing the Work of Internal Auditing 15. When the external auditor intends to use specific work of internal auditing, the external auditor should evaluate and test that work to confirm its adequacy for the external auditors purposes. 16. The evaluation of specific work of internal auditing involves consideration of the adequacy of the scope of work and related programs and whether the preliminary assessment of the internal auditing remains appropriate. This evaluation may include consideration of whether: (a) the work is performed by persons having adequate technical training and proficiency as internal auditors and the work of internal auditing is properly supervised, reviewed and documented; (b) sufficient appropriate audit evidence is obtained to afford a reasonable basis for the conclusions reached; (c) conclusions reached are appropriate in the circumstances and any reports prepared are consistent with the results of the work performed; and (d) any exceptions or unusual matters disclosed by internal auditing are properly resolved. 17. The nature, timing and extent of the testing of the specific work of internal auditing will depend on the external auditors judgment as to the risk and materiality of the area concerned, the preliminary assessment of internal auditing and the evaluation of the specific work by internal auditing. 18. The external auditor would record conclusions regarding the specific internal auditing work that has been evaluated and tested.
68
Standard No 220 Quality control of auditing activities
STANDARD No. 220 QUALITY CONTROL OF AUDITING ACTIVITIES (Promulgated together with the Finance Ministers Decision No. 28/2003/QD-BTC of March 14, 2003) GENERAL PROVISIONS 01. The purpose of this standard is to prescribe the basic principles and procedures and guide the application thereof to the quality control of audit work in the following aspects: a/ The audit firms policies and procedures relating to auditing activities; b/ Procedures relating to the work assigned to auditors and audit assistants in specific audits. 02. Auditors and audit firms must implement quality control policies and procedures for all auditing activities of audit firms and for each audit. 03. This standard shall apply to the audit of financial statements and also to the audit of other financial information and related services of audit firms. Auditors and audit firms must comply with the provisions of this standard in the process of auditing and providing related services. The audited units (clients) and the users of audit results must possess necessary knowledge of the principles and procedures prescribed in this standard so as to fulfil their duties and cooperate with auditors and audit firms in dealing with relationships in the auditing process. The terms in this standard are construed as follows: 04. Audit firm means an enterprise established and operating under the law provisions on the establishment and operation of enterprises in the field of provision of independent auditing services. 05. Director (or head) of an audit firm means the highest representative at law of that audit firm, who bears the final responsibility for the audit. 06. Professional personnel means leaders of all levels, auditors, audit assistants and consultants of an audit firm. 07. Auditor means a person who possesses the auditors certificate granted by the Ministry of Finance, has made practice registration with an independent audit firm, participates in the auditing process, may sign the auditing reports and bears responsibility for the audit before law and the director of the audit firm. 08. Audit assistant means a person who participates in the auditing process but is not permitted to sign the auditing reports. 09. Quality of auditing activities means the degree of satisfaction of the users of audit results in terms of objectivity and reliability of the audit opinions of auditors; and also satisfaction of the audited units expectations of the auditors opinions in order to improve the business efficiency within a pre-determined period and with reasonable charges. CONTENTS OF THE STANDARD Audit firms 10. Audit firms must establish and implement quality control policies and procedures with a view to ensuring that all audits are conducted in accordance with the Vietnamese auditing standards or international auditing standards accepted by Vietnam so as to constantly improve the quality of audits. 11. The contents, timetable and scope of an audit firms quality control policies and procedures depend on a number of factors such as the size and nature of its operation, geographical area of operation, organizational structure and cost and benefit considerations. The quality control policies and procedures adopted by individual firms may vary but must comply with this standards provisions on the quality control of auditing activities. Examples of quality control policies and procedures are presented in Appendix No. 01. 12. In order to achieve the objectives of quality control of auditing activities, the audit firms normally apply the following policies in combination: a/ Compliance with principles on professional ethics Professional personnel of audit firms must adhere to the audit professions principles on ethics of the audit profession, including independence, integrity, objectivity, professional capability, prudence, confidentiality, professional behavior and compliance with professional standards. b/ Professional skills and competence Professional personnel of audit firms must possess professional skills and competence, regularly maintain, update and raise their knowledge so as to fulfil their assigned tasks.
69
c/ Assignment Audit work must be assigned to trained professional personnel who have adequate professional skills and competence meeting the practical requirements. d/ Guidance and supervision The audit work must be adequately guided and supervised for personnel at all levels to secure that it has been conducted in accordance with the auditing standards and relevant regulations. e/ Consultation When necessary, auditors and audit firms must consult with experts inside or outside the firms. f/ Retention and acceptance of clients In the process of retaining existing clients and evaluating potential ones, the audit firms must take into consideration their independence and ability to serve clients as well as the integrity of the clients management boards. g/ Examination The audit firms must regularly monitor and examine the adequacy and efficiency in the process of implementing their policies and procedures for quality control of their auditing activities. 13. The audit firms policies and procedures for quality control of their auditing activities must be communicated to all of their personnel so that they can be fully understood and implemented. Individual audit contracts 14. Auditors and audit assistants must apply their firms quality control policies and procedures to each audit contract in an appropriate manner. 15. Auditors shall have to consider the professional capability of audit assistants performing the work assigned to them so as to provide guidance, supervision and examination appropriate to each audit assistant. 16. When assigning work to audit assistants, it must be ensured that such work is assigned to persons with adequate professional capability as required. Guidance 17. Auditors must guide audit assistants on the necessary contents relating to each audit such as their responsibilities for the assigned work, the objectives of the procedures they are to perform, characteristics and nature of the clients production and business activities as well as accounting or auditing matters that may affect the contents, time table and scope of auditing procedures which they are performing. 18. The overall audit plans and the audit programs shall serve as an important tool for guiding auditors and audit assistants to perform the audit procedures. Supervision 19. Supervision is closely related to guidance and examine and may involve both of these elements. 20. The audit firms personnel assigned to supervise the quality of an audit must perform the following functions: a/ Supervising the auditing process so as to determine whether or not: - Auditors and audit assistants have adequate professional skills and capability needed to fulfil their assigned tasks; - Audit assistants understand the audit guidelines; - The audit work is being conducted according to the overall audit plan and the audit program; b/ Grasping and identifying important accounting and auditing questions arising in the auditing process so as to adjust the overall audit plan and the audit program appropriately; c/ Handling the difference of professional opinions between auditors and audit assistants jointly participating in the audits and considering whether consultation with experts is needed or not. 21. The persons assigned to supervise the quality of audits must perform the following responsibilities: a/ If detecting that auditors and/or audit assistants breach the audit professions ethics or show signs of colluding with clients to distort financial statements, to report such to competent persons for handling; b/ If deeming that auditors or audit assistants fail to have the required professional skills and competence for carrying out the audits, to propose competent persons to replace such auditors and/or audit assistants so as to ensure the quality of the audits according to the set overall audit plans and audit programs. Examination 22. The work performed by the auditors and audit assistants must be examined by persons having equal or higher professional capability in order to determine whether or not: a/ The work has been performed in accordance with the audit program;
70
b/ The work performed and the results obtained have been fully documented into audit dossiers; c/ All important audit matters have been settled or reflected in audit conclusions; d/ The objectives of the audit procedures have been achieved; e/ The conclusions made in the auditing process are consistent with the results of the work performed and support the audit opinions. 23. Auditors and audit firms must regularly examine the following: a/ The implementation of the overall audit plan and the audit program; b/ The assessments of inherent and control risks, including the results of tests of control and the modifications (if any) made to the overall audit plan and the audit program; c/ The documentation in audit dossiers of the obtained audit evidences, including consultants opinions, and the conclusions drawn from the basic tests; d/ Financial statements, proposed amendments thereto and draft auditing reports. 24. When examining the quality of audits, especially big and complicated audit contracts, professional personnel outside the audit teams may be requested to carry out certain additional procedures before the issuance of the auditors report. 25. Where there still exist divergent opinions on the quality of an audit, the audit team should discuss collectively so as to reach agreement on the evaluation thereof and draw experiences. If the audit team fail to reach agreement, such should be reported to the director for handling or presented at a meeting of the firms key members. APPENDIX 01 EXAMPLE OF THE POLICIES AND PROCEDURES FOR QUALITY CONTROL OF AUDITING ACTIVITIES OF AUDIT FIRMS A. COMPLIANCE WITH THE PRINCIPLES ON PROFESSIONAL ETHICS Policy All professional personnel of audit firms must adhere to the principles on ethics of the audit profession, including independence, integrity, objectivity, professional capability, prudence, confidentiality, professional behavior and compliance with professional standards. Procedures 1. Assigning an individual or group to guide and settle questions regarding independence, integrity, objectivity and confidentiality. a/ Identifying cases where matters regarding independence, integrity, objectivity and confidentiality should be represented in writing; b/ Consulting with experts or competent persons, when necessary. 2. Disseminating policies and procedures regarding independence, integrity, objectivity, professional capability, prudence, confidentiality, professional behavior and professional standards to all professional personnel of the firms. a/ Informing them of the policies and procedures and requesting them to firmly grasp these policies and procedures; b/ Emphasizing independence and professional behavior in the training programs and the process of guiding, supervising and examining audits; c/ Informing them on a regular and timely basis of the list of clients to which independence policies apply. - The list of clients to whom the firms must apply independence, including clients affiliates, parent companies, joint-venture companies and associated companies; - Notifying such list to all professional personnel in the firms so that they can determine their independence; - Establishing procedures for notification of changes in the list. 3. Monitor and examine the implementation of policies and procedures related to the adherence to the principles on professional ethics: independence, integrity, objectivity, professional capability, prudence, confidentiality, professional behavior and compliance with professional standards. a/ Annually requesting professional personnel to submit written representations stating that: - They have firmly grasped the firms policies and procedures; - They have no prohibited investments at present and in the year when financial statements are audited; - Relationships and transactions prohibited by the firms are not established. b/ Assigning a person or group with competence to check the completeness of dossiers on independence compliance and to deal with exceptional cases.
71
c/ Periodically reviewing the relationships between the firms and clients regarding matters which may affect the audit firms independence. B. PROFESSIONAL SKILLS AND COMPETENCE Policy Professional personnel of audit firms must possess professional skills and competence, continuously maintain, update and raise their knowledge so as to accomplish their assigned tasks. Procedures Recruitment: 1. Audit firms must maintain a process of recruiting professional personnel by planning the personnel needs, setting recruitment objectives and requirements on qualification as well as compatibility of persons who perform the recruiting function. a/ Planning the needs of personnel in different posts and determining the recruitment objectives based on the existing number of clients, the projected growth rate and the number of personnel who may be laid off. b/ To achieve the recruitment objectives, designing a recruitment program with the following contents: - Identifying sources of potential personnel; - Methods of contacting potential personnel; - Methods of determining specific information on each potential personnel; - Methods of attracting potential personnel and informing them of the firms; - Methods of evaluating and selecting potential personnel so as to achieve the necessary number of applicants for selection. c/ Informing the people related to the recruitment of the firms personnel needs and recruitment objectives. d/ Assigning competent persons to decide on the recruitment. e/ Checking the effectiveness of the recruitment program: - Periodically evaluating the recruitment program to determine whether or not the firms have complied with policies and procedures for recruiting qualified personnel; - Periodically reviewing the recruitment results to determine whether or not the firms have achieved personnel recruitment objectives and needs. 2. Establish criteria and guidelines for evaluating applicants for each post. a/ Identifying the attributes to be sought in the applicants, for example: intelligence, integrity, honesty, dynamism and aptitude for the profession. b/ Identifying achievements and experiences the firms require from applicants who are new graduates or experienced ones; for example: - Academic background; - Personal achievements; - Work experiences; - Personal interests. d/ Making written guidelines for recruiting personnel in specific cases such as: - Recruiting relatives of the firms personnel, persons who have close relationships with or relatives of clients; - Re-recruiting former employees; - Recruiting clients employees; - Recruiting employees of competing firms. d/ Gathering basic information on the applicants qualifications by appropriate means, such as: - Resumes; - Job applications; - Educational diplomas; - Personal references; - References of former agency (ies); - Interviews e/ Evaluating the qualifications of new personnel, including those employed not through normal recruitment procedures (for example: those joining the firms in the capacity of supervisors, through merger or acquisition or joint ventures) to determine whether they meet the firms requirements or not. 3. Inform the applicants and new personnel of the firms policies and procedures relevant to them.
72
a/ Using a brochure or other means to introduce the firms to applicants and new personnel; b/ Preparing and distributing a manual describing the firms policies and procedures to all personnel; c/ Conducting an professional orientation program for new personnel. Professional training 4. Establish guidelines and requirements for continued professional fostering and notify them to all personnel of the audit firms. a/ Assigning a person or group the responsibility for the professional development of personnel; b/ The firms training programs must be scrutinized by professionally qualified persons and they must set forth the training objectives and education and experience requirements; c/ Setting forth orientations for the development of the firms and the profession for of new employees. - Preparing materials on the orientation for the development of the firms and the profession in order to inform new employees of their professional responsibilities and opportunities; - Assigning responsibility for conducting orientation workshops to introduce the professional responsibilities and the firms policies. d/ Designing professional training and refresher programs for all personnel at each level in the firms: - Taking into consideration compulsory regulations and voluntary guidelines of laws and professional organizations when designing professional training and refresher programs; - Encouraging participation in professional training programs outside the firms, including the form of selfstudy; - Encouraging participation in professional associations and determining whether the firms would pay the whole or part of expenses; - Encouraging personnel to serve on professional boards of professional associations, write articles, books and participate in other professional activities. e/ Periodically examining professional training programs and archiving dossiers on the training situation of the entire firms and each individual. - Periodically reviewing the participation of each employee in the training program so as to determine his/her compliance with the firms requirements; - Periodically examining the evaluation reports and other records regarding the advanced training programs to evaluate whether or not these programs are effective and have achieved the firms objectives. Considering the needs for new programs and for revision of on-going programs or elimination of ineffective training programs. 5. Provide in time all personnel with information on professional technical standards and materials containing the firms technical policies and procedures. Encourage them to engage in self-development activities. a/ Providing all personnel with professional technical materials, even those on changes, including: - National and international specialized materials on accounting and auditing; - Documents on current laws in specific domains, for employees who take charge of such domains; - Materials on the firms technical and professional policies and procedures. b/ For training programs designed by the firms, preparing materials and selecting instructors: - The programs should clearly state the objectives, requirements on participants education and experience; - The training course instructors must firmly grasp the program content and teaching methods; - Asking participants to evaluate training course contents, instructors and training conditions; - The training program must spare time for instructors to test and evaluate training course contents, teaching methods and trainees; - The training programs must be updated to accommodate new developments and renovations, and relevant evaluation reports; - Archiving, and creating conditions for exploiting, professional and technical materials on the firms regulations relating to professional technical matters. 6. In order to train a contingent of experts in specialized domains and branches, the firms must: a/ Organize on their own specialized training programs such as in banking auditing, computer-aided auditing, sampling methods b/ Encourage personnel to attend external training programs, workshops to raise their professional levels; c/ Encourage personnel to participate in professional associations concerned with specialized domains and branches.
73
d/ Provide materials relating to the specialized domains and branches. 7. Audit firms must assign persons to see that all the firms auditors participate in annual fostering and refresher programs conducted by the Ministry of Finance or by organizations authorized by the Ministry of Finance. Advancement opportunities: 8. Audit firms must establish criteria for each rank of employee in the forms: a/ Regulations on responsibilities and qualifications for each rank of employees, including: - Titles and responsibilities thereof; - Criteria on qualification and experience (or seniority) for each title. b/ Determining qualification criteria to be used as a basis for considering and evaluating the results of actual performance and capability of each rank, for example: - Professional knowledge; - Analytical and judgmental abilities; - Communication skills; - Training skills; - Leadership methods; - Client relations; - Personal attitude and professional behavior (characters, intelligence, judgment and dynamism); - Supervisory ability. c/ Compiling a personal manual or other means to disseminate the firms advancement procedures and policies to all employees. 9. Evaluate the work performance results of all employees and notify them thereof. a/ Gathering information on and evaluating the work performance results: - Identifying evaluation responsibilities and requirements at each level, indicating who will make these evaluations and when the evaluation results will be presented; - Guiding the evaluation objectives; - Using standardized forms for evaluating work performance results by self-evaluation by employees according to such forms and review by persons with higher authority. - Re-examining previous evaluations of each employee; - Personnel evaluations must be done by different persons; - Determining that evaluations are completed on schedule; - Filing written evaluations in personal dossiers; - Evaluations of leading officials must include consultations with their subordinates to determine whether these officials continue to have the qualifications to fulfill their responsibilities or not. b/ Periodically informing all employees of their progress and career prospect, clearly stating: - Performance results; - Personal and career prospects; - Advancement opportunities of each person. c/ Periodically promoting personnel on the basis of the evaluation results. C. ASSIGNMENT Policy Audit work must be assigned to trained professional personnel who have adequate professional skills and competence to satisfy the practical requirements. Procedures 1. Assign work to personnel: a/ Planning the personnel needs for each of the firms divisions; b/ Determining the personnel need for each specific audit contract; c/ Arranging personnel and allocating time for each audit contract; d/ When assigning work to employees, the following factors must be considered: - Auditing size and complexity; - Number of existing personnel; - Special capability and expertise required; - Schedule of the work to be performed; - Continuity and rotation of personnel; - Prospect of on-the-job training.
74
2. Assign work to a person or group in a specific audit. a/ Persons with responsibility for work assignment must consider the following factors: - Staffing and timing requirements of the audit contract; - Qualifications, experiences, positions, educational background and special abilities of personnel; - The participation plans of persons assigned the supervisory responsibilities; - Projected time required for of each individual; - Circumstances which may affect independence, for example: assignment of work to professional personnel who have economic or kin relation with the leaderships of the audited units. b/ When assigning work, consideration should be given to continuity and rotation to enable personnel to perform their work effectively, as well as to capabilities, qualifications and experiences of other personnel. 3. The timing and personnel plan for an audit must be approved before implementation. D. GUIDANCE AND SUPERVISION Policy Audit work must be adequately guided and supervised for personnel at all levels to ensure that it has been performed in compliance with the auditing standards and relevant regulations. Procedures 1. Procedures for planning audits a/ Assigning responsibility for planning audits; b/ Reviewing information obtained from previous audits and updating new information; c/ Working out the overall audit plan and the audit program. 2. Procedures for maintaining the quality standards: a/ Conducting supervision at all levels; considering the training process, abilities and experiences of the assigned personnel; b/ Issuing guidelines for the forms and contents of working papers; c/ Using appropriate standardized forms, checklists, and questionnaires to assist in the audit work; d/ Establishing procedures for settling differences of professional judgment. 3. Provide on-the-job training in the auditing process. a/ Regularly discussing with audit assistants the relationships between the work performed by each person and the audit as a whole and arranging assistants to participate in many portions of the audit; b/ Incorporating the content of personnel management skills into the firms training program; c/ Encouraging personnel to participate in the programs on training and developing subordinates; d/ Monitoring the assigned work to determine whether personnel have grasped professional technical knowledge and auditing experiences in each domain or not. E. CONSULTATION Policy When necessary, auditors and audit firms must consult with experts inside and outside the firms Procedures 1. Identify domains and situations where consultation is required and encourage personnel to consult with experts and competent persons. a/ Informing personnel of the firms consultation policies and procedures; b/ Specific domains or complex professional requiring consultation, such as: - Application of newly promulgated legal documents relating to professional technical matters; - Business lines with special accounting, auditing and reporting requirements; - Newly arising problems; - Requirements of law and regulations of functional bodies, especially the requirements of international law. c/ Maintaining the operation of the archival section and referring to web sites or other means, such as: - Referring to materials at various sections or the firms; - Establishing a professional manual and circulating professional instruction materials, including documents relating to particular business lines and other specialties; - Maintaining consultation with other firms and individuals; - Referring, when necessary, complicated problems to a group of specialists.
75
2. Assign persons in specialized charge and define their powers in the consultation areas. a/ Assigning archivists to work with law agencies; b/ Assigning personnel to monitor each particular business line; c/ Informing all personnel of the powers of persons in specialized charge and of the procedures for dealing with divergent opinions. 3. Specify the archival of documents on the results of consultation: + Archival responsibility; + Place of archival and conditions for use of archived documents; + Archiving dossiers relating to the consultation results for reference and research purposes. F. RETENTION AND ACCEPTANCE OF CLIENTS Policy In the process of retaining existing clients and evaluating potential clients, audit firms must consider their independence and ability to serve clients and the integrity of the clients management boards. Procedures 1. Establish procedures for evaluating and accepting potential clients. a/ Procedures for evaluating potential clients, including: - Gathering and reviewing available documents relating to potential clients, such as financial statements and tax payment declaration forms; - Exchanging with third parties information on potential clients, their directors (or heads) and key personnel; - Exchanging with the previous years auditors on matters relating to the directorates honesty, on disagreements among the directorates concerning accounting policies, audit procedures or other important matters, and on the reasons for the change of auditors; - Considering special circumstances or possible risks of contracts; - Assessing the audit firms independence and ability to serve their potential clients; - It must be determined that acceptance of clients must not violate the audit professions ethical principles. b/ Assigning a person or group at appropriate management levels to evaluate information and make decisions whether to accept clients or not. c/ Informing personnel of the firms policies and procedures for accepting clients. d/ Assigning persons to inspect and supervise the observance of the firms policies and procedures for accepting clients. 2. Evaluate clients upon the occurrence of special events to determine whether to maintain the relationships therewith or not. a/ Special events when clients should be evaluated include: - The expiry of a certain period; - A major change in one or more of the following factors: + The management board; + Directors (of heads); + Capital owners; + Legal advisers; + Financial status; + Litigation and disputes; + Contractual breaches; + Nature of the clients business lines. b/ Assigning a person or group at appropriate management levels to evaluate information and make decisions whether to retain these clients or not. c/ Informing personnel of the firms policies and procedures for retaining clients. d/ Assigning persons with responsibility to examine and supervise the observance of the firms policies and procedures for retaining clients. G. EXAMINATION Policy Audit firms must regularly monitor and examine the adequacy and effectiveness in the process of implementing the firms policies and procedures for controlling their operational quality.
76
Procedures 1. Establish the firms examination procedures, contents and program. a/ Examination procedures include: - Determining the examination objectives and working out the examination program; - Issuing guidelines on the scope of examination and criteria for selecting contents to be examined; - Setting the frequency and time of examination; - Establishing procedures for settling disagreements when they arise. b/ Setting criteria of professional qualifications and competence for selecting examiners. c/ Conducting examination activities: - Scrutinizing and examining the adherence to the firms policies and procedures for controlling the quality of audit work; - Scrutinizing and examining the compliance with the professional standards and with the firms procedures for controlling quality applicable to a selected audit contract. 2. Providing for reporting on findings in the examinations to the appropriate management levels, for examining activities already implemented or planned to be implemented, and for examining the firms audit work quality control system. a/ Discussing findings in the examination process with responsible persons; b/ Discussing findings in the process of examining selected audit contracts with the firms persons assigned with supervisory responsibility; c/ Reporting on general findings and specific findings of selected audit contracts and proposing to the directorates remedial measures already taken or planned to be taken; d/ Identifying needs for modification of audit work quality control policies and procedures on the basis of the examination results and other relevant matters.
77
Standard No 320 Audit Materiality
STANDARD No. 320 AUDIT MATERIALITY (Promulgated together with the Finance Ministers Decision No. 28/2003/QD-BTC of March 14, 2003) GENERAL PROVISIONS 01. The purpose of this standard is to prescribe the basic principles and procedures and guide the modes of application thereof to the responsibilities of auditors and audit firms when determining materiality in auditing financial statements and the relationship between materiality and audit risk. 02. When conducting audits, auditors must pay attention to materiality and its relationship with audit risk. 03. This standard shall apply to the audit of the financial statements and also to the audit of other financial information of audit firms. Auditors and audit firms must observe the provisions of this standard in the process of auditing the financial statements. The audited units (clients) and the users of audit results must possess necessary knowledge of this standard so as to cooperate in working and handling relationships relating to the determination of materiality of audited information. The terms in this standard shall be construed as follows: 04. Materiality is the concept used to express the importance of a piece of information (an accounting figure) in the financial statements. Information is regarded as material if its omission or inaccuracy could influence the decisions of users of the financial statements. Materiality depends on the magnitude and nature of information or error judged in particular circumstances. Materiality is a threshold or cut-off point rather than a content which information must have. Information materiality must be considered both quantitatively and qualitatively. CONTENTS OF THE STANDARD Materiality 05. The objective of the audit of financial statements is to enable auditors and audit firms to confirm whether or not the financial statements have been made in accordance with the current (or accepted) accounting standards and regimes, with relevant laws and honestly or rationally reflect material aspects. The determination of the level of materiality is a matter of professional judgment of auditors. 06. When planning audits, auditors must determine an acceptable materiality level to serve as a basis for detecting quantitatively material errors. However, to judge errors as material, auditors must consider them both quantitatively and qualitatively. For example, non-compliance with the current accounting regimes may be considered a material error if it leads to the incorrect presentation of indexes in the financial statements, thus making users of financial information misunderstand the nature of the matters; or the financial statements fail to describe matters relating to non-continuous activities of enterprises. 07. Auditors should consider the possibility of relatively small errors that, if added up, could have a material effect on the financial statements, such as an error in a month-end accounting procedure may become a potential material error if it is repeated each month. 08. Auditors should consider materiality in terms of the extent of erroneousness of the financial statements as a whole in relation to detailed errors in individual account balances, transactions and information disclosed in the financial statements. Materiality may be influenced by other factors such as legal requirements or matters related to different financial statement items and the relationships between these items. In the process of consideration, different materiality levels may be discovered, depending on the nature of matters put forward in the audited financial statements. 09. Auditors must determine materiality when: a/ Determining the contents, timing and scope of auditing procedures; b/ Evaluating the effect of errors. The relationship between materiality and audit risk 10. When planning audits, auditors must consider factors which may give rise to material errors in the financial statements. The auditors assessment of materiality relating to account balances and major transactions shall help the auditors determine which items to be examined and decide to use sampling or analytical procedures. The materiality assessment relating to account balances and major transactions shall help the auditors select suitable audit procedures that, when combined, shall reduce audit risk to an acceptable level.
78
Standard No 320 Audit Materiality
11. There is an inverse relationship between materiality and audit risk in an audit: The higher the materiality level is, the lower the audit risk would be and vice versa. Auditors should take this relationship into account when determining the contents, timing and scope of audit procedures in an appropriate manner, such as when planning audits, if auditors determine that the acceptable materiality level is low, audit risk is increased. In this case, auditors may: a/ Reduce the assessed level of control risk by carrying out extended or additional tests of control so as to prove the reduced level of control risk; or b/ Reduce detection risk by modifying the contents, timing and scope of detailed examination procedures already planned. Materiality and audit risk in evaluating audit evidences 12. The auditors materiality and audit risk assessment results at the time of initially planning the audits may be different from the assessment results at different times in the auditing process. Such difference could be attributed to a change in practical circumstances or a change in the auditors knowledge of the audited units on the basis of the obtained audit results, such as when the audit is planned before the end of a fiscal year, the auditors have assessed materiality and audit risk on the basis of the enterprises anticipated operation results and financial situation. If the enterprises actual financial situation and operation results are substantially different therefrom, the assessment of materiality and audit risk will also change. Moreover, when planning audits, auditors usually set the acceptable materiality level lower than that is used to evaluate the audit results in order to increase the possibility to detect errors. Evaluation of the effect of errors 13. When evaluating the financial statements honesty and rationality, auditors must assess whether the aggregate of uncorrected errors which have been detected in the auditing process constitutes a material error or not. 14. The aggregate of uncorrected errors comprises: a/ Errors detected by auditors in the current year, including those detected in the previous years and not yet corrected in the audit year; b/ The auditors estimation of other errors which cannot be specifically determined (projected errors) in the financial statements of the audit year. 15. Auditors should consider whether the aggregate of uncorrected errors may be material or not. If they conclude that the aggregate of such errors is material, they should take action to reduce audit risk by adding necessary audit procedures or requesting the directors of the audited units to adjust the financial statements. 16. Where the directors of the audited units refuse to adjust the financial statements and the results of application of additional audit procedures permit the auditors to conclude that the aggregate of uncorrected errors is material, they should consider and modify the auditing reports in accordance with Vietnamese Auditing Standard No. 700 Auditing reports on financial statements. 17. If the aggregate of uncorrected errors which have been detected approximates the set materiality level, auditors must consider the possibility that whether the undetected errors, when combined with those detected but uncorrected, could constitute material errors or not. In this case, auditors should reduce audit risk by adding necessary audit procedures or requesting the directors to adjust the financial statements to correct the detected errors.
79
Standard No 501 Additional audit evidences for special items and events
STANDARD 501 ADDITIONAL AUDIT EVIDENCES FOR SPECIAL ITEMS AND EVENTS (Promulgated together with the Finance Ministers Decision No. 28/2003/QD-BTC of March 14, 2003) GENERAL PROVISIONS 01. The purpose of this standard is to prescribe the basic principles and procedures and guide modes of application thereof to the gathering of additional audit evidences for special items and events in the process of auditing financial statements. The principles and procedures prescribed in this standard supplement those prescribed in Standard No. 500 Audit evidences. 02. The application of the principles and procedures described in this standard shall assist auditors and audit firms in obtaining sufficient appropriate audit evidences for special items in the financial statements and several related events. 03. This standard shall apply to the audit of financial statements and also to the audit of other financial information and related services of audit firms. Auditors and audit firms must observe the provisions of this standard in the process of conducting audits. The audited units (clients) and users of the audit results must possess necessary knowledge of this standard so as to cooperate in dealing with relationships relating to the supply and gathering of audit evidences for special items and events. CONTENTS OF THE STANDARD 04. Special items and events in the audit of financial statements normally include: - Inventory; - Receivables; - Long-term investments; - Litigation and dispute cases; - Information on various domains or geographical areas. Whether items and events are determined as special or not depends on each audited unit and the assessment of auditors. When determining that items or events are special, auditors must perform the following: Participation in inventory counts 05. The audited units must establish inventory counting procedures and count inventory physically at least once a year to serve as a basis for checking the reliability of the regular declaration system and for preparing financial statements. 06. When inventory is determined as material to the financial statements, auditors must gather sufficient appropriate audit evidences regarding the existence and conditions of inventory by participating in physical inventory counts unless such participation is impossible. When the units count inventory, auditors may only supervise the counting or directly join in counting inventory samples so as to gather evidences regarding compliance with the counting procedures and check the reliability of these procedures. 07. If unable to participate in the physical inventory counts on the planned date, auditors must re-count a number of commodity items on another date and, when necessary, check inventory fluctuations occurring before the time of recounting and after the time the units take the count. 08. If unable to participate in the count, for example due to the nature and location of the count, auditors must determine whether they can carry out alternative inspection procedures in order to gather sufficient appropriate evidences regarding the existence and conditions of inventory, so that they can avoid to express an exclusion opinion because of the limitation in the auditing scope, for example, checking sale vouchers after the date of physical inventory count may provide appropriate audit evidences. 09. If auditors plan to participate in the physical inventory count or carry out alternative inspection procedures, they must consider the following factors: - The characteristics of the accounting and internal control systems relating to inventory; - Inherent, control and detection risks, and materiality of the item of inventory; - Whether or not the inventory counting procedures have been established and instructed to inventory counters; - The inventory count plan; - The locations of inventory counting; - The necessity to invite experts to participate in the counting.
80
10. Where auditors have participated in the physical inventory count one or more times during the year, they only need to observe the carrying out of counting procedures and check inventory samples. 11. If units estimate the inventory quantity, such as estimating a coal pile, auditors must consider the reasonableness of this method of estimation. 12. When the physical inventory count is taken simultaneously at various locations, auditors must select appropriate locations for participation in the count, depending on the materiality of the category of inventory and the assessment of inherent and control risk at these locations. 13. Auditors must check the audited units regulations on inventory count: a/ The application of control procedures, such as checking of methods of weighing, measuring, counting, receiving and delivering inventory; procedures for recording warehouse books, warehouse cards, recording of count cards and summing of count results; b/ The determination of unfinished products, slow-moving, obsolete or damaged goods, goods sent for processing, to agents or on consignment, goods received for processing, for agency sale; c/ The determination of appropriate procedures relating to the internally circulated goods, goods received and delivered before and after the counting date. 14. To ensure the inventory count procedures be strictly complied with, auditors must supervise the carrying out of these procedures and may directly participate in the sample count. Auditors must check both the accuracy and completeness of the count cards by selecting and checking a number of commodity items actually kept in the warehouses for comparison with the count cards or selecting and checking a number of count cards for comparison with the goods actually kept in the warehouses. Of the checked count cards, auditors should consider which ones need to be retained for subsequent checking and comparison. 15. Auditors should also consider period-end procedures, mostly details of the value of inventory moved just before, during and after the count so that the accounting of such value can be checked later. 16. In practice, the physical inventory count may be conducted at a time other than period end. This method will normally apply to audits only when control risk is assessed as low or average. In this case, auditors must carry out appropriate procedures to consider whether fluctuations in inventory between the count date and the period-end date are correctly accounted or not. 17. If the audited units apply the periodical count method for accounting inventory, the value of inventory is determined at the period-end, but auditors must carry out several additional procedures to assess whether or not the reasons for any significant differences between the count data and the data in accounting books have been determined by the units and to check whether or not such differences have been adjusted. 18. Auditors must check the year-end lists of counted inventory to determine whether they reflect fully and accurately the actual inventory quantities or not. 19. Where inventory is under the control or custody of a third party, auditors must request the third party to directly confirm the quantities and conditions of inventory held by the third party on behalf of the unit. Depending on materiality of this inventory, auditors should also consider the following factors: - The integrity and independence of the third party; - The necessity to directly participate in the count or to invite other auditors or audit firms to participate in the count; - The necessity to have other auditors reports on the compatibility of the third partys accounting and internal control systems for ensuring that inventory is correctly counted and carefully preserved. - The necessity to examine inventory-related documents held by the third party, for example, warehouse receipts, confirmations from other parties that they are holding such inventory as collateral. Confirmation of receivables 20. Where receivables are determined as material to the financial statements and when it is likely that debtors will respond, auditors must plan to request these debtors to confirm such receivables or data constituting the account balance of receivables. 21. Direct confirmation shall provide reliable audit evidences regarding the existence of receivables and the accuracy of account balances. However, such confirmation does not normally provide sufficient evidences regarding the recoverability of receivables or regarding the existence of unaccounted receivables.
81
22. Where auditors assume that debtors will not respond to letters of request for confirmation of receivables, they must plan alternative procedures, for example, examining documents constituting the account balance of receivables. 23. Auditors may sort out receivables which need to be confirmed so as to ensure the existence and accuracy of receivables as a whole, taking into account receivables that may affect identified audit risk and other planned audit procedures. 24. Letters of request for confirmation of receivables shall be sent by auditors, clearly stating the authorization by the audited units and the permission for debtors to supply information directly to auditors. 25. Auditors letters of request for confirmation of receivables (possibly including confirmation of payables) in Vietnam dong and in foreign currency (if any) may take two forms: - Form A: clearly stating the amount of receivables and requesting debtors to confirm it is correct or how much it is; - Form B: not stating the amount of receivables but requesting debtors to clearly indicate the amount of receivables or express different opinions. 26. Form-A confirmation (see paragraph 25) provide audit evidences more reliable than form-B confirmation (see paragraph 25). The selection of either form depends on each specific circumstance and the auditors assessment of potential risk and control risk. Form-A confirmation is more appropriate when potential risk and control risk are assessed as high. 27. Auditors may combine both forms of confirmation above. For example, when the total of receivables consists of a small number of large receivables and a large number of small receivables, auditors may request Form-A confirmation for all or some large receivables and accept Form-B confirmation for a large number of small receivables. 28. Past a reasonable period of time after sending letters of request for debt confirmation, if receiving no replies from debtors, auditors may send a reminder letter to them. Letters of confirmation of exceptional cases should be more thoroughly investigated. 29. Auditors must perform alternative procedures or continue investigating and/or interviewing when: - No reply is received; - Replies confirm debt amounts different from the balances of the audited units; - Replies contain different opinions. After performing alternative procedures or continuing investigating and/or interviewing, if finding that there is still not enough reliable evidences or it is impossible to perform alternative procedures, any difference shall be regarded as an error. For example, performing alternative procedures such as examining sales invoice and receipts of receivables for which no reply is received. 30. In practice, when control risk is assessed as low, auditors may request confirmation of the balance of receivables at a time other than the last day of the fiscal year. For example, if auditors must finish the audit work within a very short time limit after the last day of a year, they must examine all transactions occurring between the time when the balance of receivables is confirmed and the last day of the fiscal year. 31. Where the directors of the audited units request auditors not to send letters of request for confirmation to a number of debtors, auditors must consider whether such requests are justified or not. For example, if a receivable is being disputed between the two parties or if requests for confirmation of debts would badly affect on-going negotiations between the units and debtors. Before accepting such requests, auditors must consider evidences supporting the directors explanations. In this cases, auditors must apply alternative procedures for the balance of receivables for which letters of request for confirmation must not be sent. Valuation and presentation of long-term investments 32. If long-term investments are regarded as material to the financial statements, auditors must gather sufficient appropriate audit evidences regarding the valuation and presentation of long-term investments. 33. The procedures for auditing long-term investments normally aim to determine whether or not the units have the ability and intend to hold these long-term investments and must gather written representation to that effect. 34. The audit procedures normally include the examination of financial statements and other relevant information, such as determination and comparison of the market prices of securities with the book value of long-term investments up to the date of the auditing reports.
82
35. If the market prices are lower than the book value, auditors must consider the necessity to set up price decrease reserves. If doubting the recoverability of investments, auditors must take into account appropriate adjustments and explanations presented in the financial statements. Litigation and dispute cases 36. Litigation and dispute cases involving the audited units, which may have a material effect on the financial statements, must be presented in the financial statements as provided for. 37. Auditors must carry out procedures to identify litigation and dispute cases involving the units, which may have a material effect on the financial statements. These procedures include: - Inquiring the directors, asking for written representations; - Examining minutes of meetings of the management boards and correspondence with the units legal advisors; - Examining legal advise expenses; - Using all information relating to litigation and dispute cases. 38. When litigation and/or dispute cases have been identified or when auditors doubt that they may exist, they must request the units legal advisors to directly supply information. With this method, they can obtain sufficient appropriate audit evidences regarding the cases as well as the degree of damage affecting the units financial statements. 39. Letters of request for the units legal advisors to supply information on litigation and/or dispute cases must be signed by the audited units and sent by auditors. Such a letter contains the following contents: - A list of litigation and/or dispute cases; - The assessment by the audited units director of the consequences of the litigation and/or dispute cases and estimation of their financial impacts, including related legal expenses. - A request that the units legal advisor confirms the reasonableness of the directors assessments and provides the auditors with further information 40. Auditors must consider the happenings of litigation and/or dispute cases up to the date of signing of the auditor reports. When necessary, auditors may gather updated information from legal advisors. 41. Where the cases are very complicated or there is disagreement between the directors of the audited units and their legal advisors, auditors must meet with the legal advisors to discuss the consequences of the cases. Such meetings must be consented by the directors of the audited units and attended by representatives of the units directorates. 42. Where the directors of the audited units refuse to permit auditors to meet with the units legal advisors, this will constitute a limitation in the auditing scope and auditors must give a partial acceptance opinion or an opinion on refusal to express opinion. Where the clients legal advisors refuse to reply with plausible reasons and auditors are also unable to gather sufficient audit evidences by applying alternative procedures, the auditors must consider whether this constitutes a limitation in the auditing scope and thus may express a partial acceptance opinion or an opinion on refusal to express opinion Information on various domains or geographical areas 43. Where information relating to various domains and geographical areas is regarded as material to the financial statements, auditors must gather sufficient appropriate audit evidences regarding the information which needs to be disclosed in the financial statements in accordance with the current accounting standards. 44. Auditors must consider information relating to various domains and geographical areas in relation to the financial statements taken as a whole. Auditors are not required to apply audit procedures in order to express their own opinions on information relating to various domains and geographical areas. However, the concept of materiality must encompass both quantitative and qualitative factors and the auditors procedures used for determining material information must reckon this. 45. The audit procedures for information relating to various domains and geographical areas normally consist of analytical procedures and audit tests appropriate in each specific circumstance. 46. Auditors should discuss with the directors of the audited units the methods used to collect information relating to various domains and geographical areas, and consider whether or not these methods are in accordance with the current accounting standards and ensure that they are strictly applied. To realize this, auditors must consider sale turnover, charges of transfers between domains or geographical areas, elimination of amounts arising within a domain or area; comparisons with plans and other budget estimates, for example, the percentage of profits over sale turnover, and the allocation of assets and costs
83
among segments in consistency with previous periods and the adequacy of the presentations in the financial statements when inconsistency exists.
84
Standard No 560 Events occurring after the date of closing accounting books & making financial statements
STANDARD 560 EVENTS OCCURRING AFTER THE DATE OF CLOSING ACCOUNTING BOOKS AND MAKING FINANCIAL STATEMENTS (Promulgated together with the Finance Ministers Decision No. 28/2003/QD-BTC of March 14, 2003) GENERAL PROVISIONS 01. The purpose of this standard is to prescribe the basic principles and procedures and guide the modes of application thereof to the responsibility of auditors and audit firms when considering events occurring after the date of closing accounting books and making financial statements for auditing in the process of auditing the financial statements. 02. Auditors must consider the effect of events occurring after the date of closing accounting books and making financial statements on the financial statements and the auditing reports. 03. This standard shall apply to the audit of financial statements and also to the audit of other financial information of audit firms. Auditors and audit firms must observe the provisions of this standard in the process of auditing financial statements. The audited units (clients) must possess necessary knowledge of this standard so that they can cooperate with auditors in supplying information and materials relating to the events occurring after the date of closing accounting books and making financial statements. The terms in this standard are construed as follows: 04. Events occurring after the date of closing accounting books and making financial statements mean events affecting the financial statements, which have occurred after the date of closing accounting books and making financial statements till the date of signing the auditing report; and events detected after the date of signing the auditing report. There are two kinds of events occurring after the date of closing accounting books and making financial statements: a/ Events that provide further evidences of the events that existed up to the date of closing accounting books and making financial statements; b/ Events that provide signs of events that arose after the date of closing accounting books and making financial statements. 05. The date of closing accounting books and making financial statements means the date lasting till the end of the last day of the accounting year. For example, if the accounting year spans from January 1 to December 31 of the calendar year, the date of closing accounting books and making financial statements lasts until the 24th hour of December 31 of such year. 06. The financial statement date means the date inscribed on a financial statement above the section reserved for the directors (or authorized persons) signature and the stamp of the audited unit. The financial statement date must be subsequent to the date of closing accounting books and making financial statements. 07. The date of signing the auditing report means the date inscribed on an auditing report above the section reserved for the auditors signature, the directors (or authorized persons) signature and the stamp of the audit firm. The date of signing the auditing report may be either the date of actually signing the auditing report or the date when the audit work finishes at the audited unit. The audit firms must decide on their own the date of signing the auditing report which, however, must be subsequent to or coincide with the financial statement date. 08. The financial statement publicization date means the date of the postmark or the earliest date of signing for receipt of the financial statements and auditing reports which are submitted to the State bodies or publicized. CONTENTS OF THE STANDARD 09. Events occurring after the date of closing accounting books and making financial statements and relating to the responsibility of auditors and audit firms are classified into three stages: - Events occurring up to the date of signing the auditing report; - Events discovered after the date of signing the auditing report but before the financial statement publicization date;
85
- Events discovered after the financial statement publicization date. Events occurring up to the date of signing the auditing report 10. Auditors must establish and perform audit procedures to gather sufficient appropriate audit evidences in order to determine all events occurring up to the date of signing the auditing report, which may affect the financial statements, and request the units to make adjustment of, or present explanations in, the financial statements. These procedures supplement routine procedures applied to special events occurring after the date of closing accounting books and making financial statements in order to collect further audit evidences regarding account balances at the time of making financial statements. However, auditors are not required to consider all matters on which previously applied procedures have provided satisfactory conclusions. For example, examining the sale of inventory and the settlement of debts after the date of closing accounting books would provide evidences regarding the value of inventory in the financial statements. 11. The procedures to identify events that may require the audited units to adjust the financial statements or present explanations therein should be performed at a time nearest to the date of signing the auditing report and normally include the following steps: + Reviewing procedures the units have prescribed to ensure that all events occurring after the date of closing accounting books and making financial statements are identified. + Reading minutes of the meetings of shareholders, the management boards, the Control Boards and the directorates held after the date of closing accounting books and making financial statements, and inquiring about matters discussed at these meetings but not recorded in the minutes. + Reading the units financial statements of the latest period and the financial plans as well as other management reports of the directors. + Requesting the units or their lawyers to supply further information concerning the previously notified litigation and/or dispute cases or other litigation and dispute cases (if any). + Inquiring the units directors to identify events which occur after the date of closing accounting books and making financial statements and may materially affect the financial statements, such as: - Data temporarily calculated or not yet confirmed; - Commitments, borrowings or guarantees, which have been recently entered into; - Sales of assets, which have been effected or are planned; - Newly issued shares or bonds; - Merger or dissolution agreements, which have been signed or are planned; - Assets which have been appropriated or destroyed due to fire or flood - Risks or contingencies; - Unusual accounting adjustments, which have been made or are planned; - Events which have occurred or are likely to occur and thereby render inappropriate the accounting policies already used for making financial statements. For example, the occurrence of bad debts would render invalid the presumption on the continuity of business activities. 12. Where a subordinate unit (a companys branch or a company under a corporation) is audited by another independent audit firm, auditors who audit the superior unit must consider the procedures applied by such audit firms auditors to the events occurring after the date of closing accounting books and making financial statements and examine whether or not they need to inform such audit firm of the expected date of signing their auditing reports. 13. When recognizing that the events occurring after the date of closing accounting books and making financial statements materially affect the financial statements, auditors must determine whether these events are correctly calculated and properly presented in the audited financial statements. Events discovered after the date of signing the auditing report and before the financial statement publicization date 14. Auditors are not required to apply procedures or review matters relating to the financial statements after the date of signing the auditing report. The directors of the audited units shall, however, have to notify the auditors or audit firms of the events which have occurred after the date of signing the auditing report and before the financial statement publicization date and may affect the audited financial statements. 15. Where auditors become aware of an event which occurs after the date of signing the auditing report and before the financial statement publicization date and may materially affect the financial statements,
86
they must consider whether or not the financial statements and auditing reports need to be amended and must discuss this matter with the audited units directors so as to take appropriate measures in each particular circumstance. 16. Where, at the auditors request, the directors of the audited units accept to amend the financial statements, the auditors shall perform necessary procedures suitable to the practical circumstances and then provide the audited units with a new report based on the amended financial statements. The new auditing report must be signed at the same date of the amended financial statements or at a later date. In this case, auditors must perform the audit procedures specified at paragraphs 10 and 11 till the date of signing the amended auditing report. 17. Where the directors of the audited units do not amend the financial statements as requested by auditors, and the auditing reports have not yet been sent to the audited units, the auditors and audit firms shall make a new auditing report expressing a partial acceptance opinion or non-acceptance opinion. 18. Where events which have a material effect on the financial statements are discovered only after the auditing reports have been sent to the audited units, the auditors shall request the heads of the audited units not to publicize the financial statements and the auditing reports to third parties. If the units still decide to publicize these reports, the auditors must apply appropriate measures to prevent the third parties from using their auditing reports. The preventive measures taken will depend on the auditors legal powers and obligations as well as the recommendations of the auditors lawyers. Events discovered after the financial statement publicization date 19. After the financial statements and the auditing reports have been publicized, auditors are not required to consider and examine any data or events relating to the audited financial statements. 20. After the financial statements and the auditing reports have been publicized, if auditors become aware of events which occurred up to the date of signing the auditing report and cause the auditors to modify the auditing reports, the auditors should consider whether the financial statements and the auditing reports need to be revised or not and must discuss this matter with the directors of the audited units and take appropriate measures in each particular circumstance. 21. Where the directors of the audited units accept to revise the financial statements, the auditors must carry out necessary appropriate procedures and review the measures taken by the audited units to ensure that any recipients of the financial statements and the auditing reports are informed of this matter. At the same time, the auditors and audit firms must publicize a new auditing report based on the revised financial statements. 22. The new auditing reports must contain a paragraph explaining the reasons for the revision of the previously publicized financial statements and auditing reports. The new auditing reports shall be signed at the same date of the revised financial statements or at a later date. In this case, auditors must perform the audit procedures specified at paragraphs 10 and 11 till the date of the revised auditing report. 23. Where the directors of the audited units do not notify the matter mentioned at paragraph 21 above to the recipients of the previously publicized financial statements and auditing reports nor revise the financial statements at the auditors requests, the auditors and audit firms must notify the directors of the audited units of the measures to be taken by the auditors to prevent the third parties from using the auditing reports. The preventive measures taken will depend on the auditors legal powers and obligations as well as the recommendations of the auditors lawyers. 24. Where the financial statements for the following fiscal year are being audited by the audit firms and are bound to be publicized, it may not be necessary to revise the financial statements and auditing reports for the preceding fiscal year provided that the matter mentioned at paragraph 21 above is clearly described in the representations on the financial statements for the following year. Cases where the audited units issue securities 25. Where the audited units issue securities on the market, auditors must consider any law provisions relating to the securities issuance. For example, auditors may be required to carry out additional audit procedures till the date when the audited units post up securities issuance information. These procedures normally include measures specified at paragraphs 10 and 11 till the time of posting up information and reviewing documents on the posted information to ascertain that the posted information is consistent with the financial information already confirmed by the auditors.
87
Standard No 600 Use of other auditors materials
STANDARD No. 600 USE OF OTHER AUDITORS MATERIALS (Promulgated together with the Finance Ministers Decision No. 28/2003/QD-BTC of March 14, 2003) GENERAL PROVISIONS 01. The purpose of this standard is to prescribe the basic principles and procedures and guide the mode of application thereof to the use of other auditors auditing materials regarding the financial information of one or many units when auditing the financial statements of a unit, including financial information of subordinate units and of other economic units. 02. When the principal auditors use the audit materials of other auditors, they must determine the extent of influence of such materials on their audits. 03. This standard shall apply to the audit of the financial statements of a unit, which include financial information of one or many subordinate units, and other economic units. This standard shall not apply to cases involving two or more auditors appointed as joint auditors for a unit, nor does it deal with the relationship between the present auditors and the previous years auditors. Where the principal auditors conclude that the financial statements of subordinate units and other economic units have an immaterial effect, this standard shall not apply, except where many units, though each having an immaterial effect, can together produce a material effect, the application of this standard should be considered. The audited units (clients), units and individuals related to the use of other auditors materials by the principal auditors must possess necessary knowledge of the essential principles and procedures in this standard so that they can cooperate with the audit firms and the principal auditors in the auditing process. The terms in this standard are construed as follows: 04. Principal auditors mean the auditors with responsibility for auditing the financial statements and signing the auditing reports of units, including financial information of one or many subordinate units and other economic units audited by the other auditors. 05. Other auditors mean the auditors with responsibility for auditing the financial statements and signing the auditing reports of subordinate units or other economic units, which are included in the financial statements of the superior unit. Another auditor is the auditor working for another audit firm or for a branch or office of the audit firm. 06. Subordinate units mean units, components, branches, subsidiaries or member companies of the superior units, whose financial information is included in the superior units financial statements audited by the principal auditors. 07. Other economic units mean units, joint-venture companies, associated companies with economic relations, whose financial information is included in the units financial statements audited by the principal auditors. CONTENTS OF THE STANDARD Acceptance as principal auditors 08. To accept auditor contracts with the principal auditors responsibility, auditors and audit firms must consider the following matters: + The materiality of the portion of the financial statements which the principal auditors audit; + The principal auditors knowledge about the situation of business activities of the subordinate units and other economic units audited by the other auditors; + The risk of material errors in the financial statements of the subordinate units and other economic units audited by other auditors; + The possibility to perform additional procedures as prescribed in this standard, which relate to financial information of subordinate units and other economic units audited by other auditors with the participation of the principal auditors. Audit procedures performed by the principal auditors 09. When planning the audits involving the use of other auditors materials, the principal auditors must consider the professional capability of the audit firms and other auditors in the context of their actual work. In order to consider professional capability of the audit firms and other auditors, the principal auditors must base themselves on the following sources of information: the audit organizations where the other
88
auditors have made practice registration; colleagues of the other auditors; clients or people having working relations with the other auditors, or through face-to-face meetings with the other auditors. 10. The principal auditors should perform necessary procedures to obtain sufficient appropriate audit evidences that the other auditors work is relevant to the principal auditors audit work and purposes in each specific audit. 11. The principal auditors should advise the other auditors of: + The independence requirements related to the superior unit, subordinate units and other economic units and obtain written representations on compliance therewith + The use of the other auditors materials and reports and the coordination between the two parties right at the audit planning stage; + Matters requiring special consideration; procedures for identification of internal transactions that need to be stated in written explanations, and the timetable for the audit; + The accounting, auditing and reporting requirements and obtain written representations on compliance therewith. 12. The principal auditors may discuss with the other auditors the audit procedures already applied by the latter or review the other auditors audit dossiers. The performance of these audit procedures will depend on the specific context of the audit and on the principal auditors assessment of the professional capability of the other auditors. 13. The principal auditors are not required to apply the procedures stated in paragraph 12 if they have sufficient appropriate audit evidences that the audit procedures performed by the other auditors are satisfactory and ensure the audit quality. 14. The principal auditors must consider the significant findings of the other auditors. 15. The principal auditors may discuss with the other auditors and the directors of the subordinate units and other economic units the significant findings or other matters affecting the financial statements of such units. When necessary, the principal auditors may perform additional procedures to check the records or financial statements of the subordinate units. Depending on the particular circumstances, these checking procedures may be performed by the principal auditors or the other auditors. 16. The principal auditors should archive in their audit dossiers documents relating to the financial statements of the subordinate units and other economic units audited by the other auditors; documents on the performance of audit procedures and conclusions reached therefrom; the names of the other auditors and any conclusions, though being immaterial, reached by the other auditors. Cooperation between auditors 17. The other auditors must cooperate with the principal auditors in cases the principal auditors use their auditing materials. For example, the other auditors must inform the principal auditors of any portions of their work that cannot be carried out as requested or of any matters significantly affecting the other auditors work, which are of the principal auditors concern. Similarly, the principal auditors should notify the other auditors of any matters which are discovered by the principal auditors and may considerably affect the financial statements of the subordinate units or other economic units audited by the other auditors. The cooperation between auditors should be agreed upon by the authorities managing the audits. Conclusions and elaboration of auditing reports 18. When the principal auditors conclude that the other auditors materials cannot be used and they has not been able to perform additional audit procedures for the financial statements of the subordinate units and other economic units audited by the other auditors, if deeming that such would materially affect the audited financial statements, the principal auditors should express a partial acceptance opinion or an opinion to refuse to express an opinion because there is a limitation in the scope of the audit. 19. When the principal auditors have relied on the other auditors opinions, their reports must clearly state this and specify the limitation of the financial statements audited by the other auditors. 20. Where the other auditors issue or plan to issue a modified auditing report, the principal auditors should consider the nature and significance of the modifications in relation to the financial statements audited by the principal auditors and determine whether their auditing reports need to be modified. Responsibility of the principal auditors 21. The principal auditors must observe the principles and procedures prescribed in this standard when auditing the financial statements of the superior units, which include financial information of the
89
subordinate units and other economic units, and must be responsible for the financial statement audit risks.-
90
Standard No 401 Auditing in a computer information systems environment
STANDARD 401 AUDITING IN A COMPUTER INFORMATION SYSTEMS ENVIRONMENT (Issued in pursuance of the Minister of Finance Decision No. 195/2003/QD-BTC dated 28 November 2003) GENERAL 1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide guidance on procedures to be followed by the auditor and the audit firm when conducting an audit is in a computer information systems (CIS) environment. The auditor should consider how a CIS environment affects the audit. This VAS applies to audits of financial statements in a CIS environment and also applies to an audit of other financial information and related services rendered by the audit firm in a clients CIS. The overall objective and scope of an audit does not change in a CIS environment. The use of a computer changes the processing, storage and communication of financial information and may affect the accounting and internal control systems employed by the entity. Accordingly, a CIS environment may affect: The procedures followed by the auditor in obtaining a sufficient understanding of the accounting and internal control systems. The consideration of inherent risk and control risk through which the auditor arrives at the risk assessment. The auditors design and performance of tests of control and substantive procedures appropriate to meet the audit objective.
2.
3.
4.
It is expected that the audited (client) entity and other entities and individuals relating to the audit of financial statements in a CIS environment should possess essential knowledge as to the fundamental principles and objectives set out in this VSA in working with the auditor and the audit firm during the audit. In this VSA, the following terms have the meaning attributed below:
5. Computer Information Systems Environment is an environment in which the audited entity keeps
records and process financial information using a computer of any type or size at a certain level of application, whether that computer is operated by the entity or by a third party. CONTENTS OF THE VSA Skills and Competence 6. The auditor and the audit firm should have sufficient knowledge of the CIS to plan, direct, supervise and review the work performed. The auditor should consider whether specialized CIS skills are needed in an audit. These may be needed to: Obtain a sufficient understanding of the accounting and internal control systems affected by the CIS environment. Determine the effect of the CIS environment on the assessment of overall risk and of risk at the account balance and class of transactions level. Design and perform appropriate tests of control and substantive procedures. If specialized skills are needed, the auditor would seek the assistance of a professional possessing such skills, who may be either on the auditors staff or an outside professional. If the use of such a professional is planned, the auditor should obtain sufficient appropriate audit evidence that such work is adequate for the purposes of the audit, in accordance with VSA 620 Using the Work of
91
an Expert. Planning
7. In accordance with VSA 400 Risk Assessments and Internal Control, the auditor and the
audit firm should obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. 8. In planning the portions of the audit which may be affected by the clients CIS environment, the auditor and the audit firm should obtain an understanding of the significance and complexity of the CIS activities and the availability of data for use in the audit. This understanding would include such matters as: The significance and complexity of computer processing in each significant accounting application. Significance relates to materiality of the financial statement assertions affected by the computer processing. An application may be considered to be complex when, for example: - The volume of transactions is such that users would find it difficult to identify and correct errors in processing. - The computer automatically generates material transactions or entries directly to another application. - The computer performs complicated computations of financial information and/or automatically generates material transactions or entries that cannot be (or are not) validated independently. - Transactions are exchanged electronically with other organizations without manual review. The organizational structure of the clients CIS activities and the extent of concentration or distribution of computer processing throughout the entity, particularly as they may affect segregation of duties. The availability of data. Source documents, certain computer files, and other evidential matter that may be required by the auditor may exist for only a short period or only in machine-readable form. Client CIS may generate internal reporting that may be useful in performing substantive tests. The potential for use of computer-assisted audit techniques may permit increased efficiency in the performance of audit procedures, or may enable the auditor to economically apply certain procedures to an entire population of accounts or transactions.
9. When the audited entitys CIS are complex and significant, the auditor and the audit firm
should also obtain an understanding of the CIS environment and whether it may influence the assessment of inherent and control risks. The nature of the risks and the internal control characteristics in CIS environments include the following: Lack of transaction trails: Some CIS are designed so that a complete transaction trail that is useful for audit purposes might exist for only a short period of time or only in computer readable form. Where a complex application system performs a large number of processing steps, there may not be a complete trail. Accordingly, errors embedded in an applications program logic may be difficult to detect on a timely basis by manual (user) procedures. Uniform processing of transactions: Computer processing uniformly processes like transactions with the same processing instructions. Thus, the clerical errors ordinarily associated with manual processing are virtually eliminated. Conversely, programming errors (or other systematic errors in hardware or software) will ordinarily result in all transactions being processed incorrectly. Limited segregation of functions: Many control procedures that would ordinarily be performed by separate individuals in manual systems may be concentrated just on one or a few individuals in CIS. Potential for errors and irregularities: The potential for human error in the development, maintenance and execution of CIS may be greater than in manual systems. Also, the potential for
92
individuals to gain unauthorized access to data or to alter data without visible evidence may be greater in CIS than in manual systems. In addition, decreased human involvement in handling transactions processed by CIS can reduce the potential for observing errors and irregularities. Errors or irregularities occurring during the design or modification of application programs or systems software can remain undetected for long periods of time. Initiation or execution of transactions: CIS may include the capability to initiate or cause the execution of certain types of transactions, automatically. The authorization of these transactions or procedures may not be documented in the same way as those in a manual system, and managements authorization of these transactions may be implicit in its acceptance of the design of the CIS and subsequent application. Dependence of other controls over computer processing: Computer processing may produce reports and other output that are used in performing manual control procedures. The effectiveness of these manual control procedures can be dependent on the effectiveness of controls over the completeness and accuracy of computer processing. In turn, the effectiveness and consistent operation of transaction processing controls in computer applications is often dependent on the effectiveness of general CIS controls. Potential for increased management supervision: CIS can offer management a prompt provision of larger information that may be used to review and supervise the operations of the entity in a timely and more adequate manner. Potential for the use of computer-assisted audit techniques: The case of processing and analyzing large quantities of data using computers may provide the auditor with opportunities to apply general or specialized computer audit techniques and tools in the execution of audit tests. Both the risks and the controls introduced as a result of these characteristics of CIS have a potential impact on the auditors assessment of risk, and the nature, timing and extent of audit procedures. Assessment of Risk
audit firm should make an assessment of inherent and control risks for material financial statement assertions. 11. The inherent risks and control risks in a CIS environment may have both a pervasive effect and an account-specific effect on the likelihood of material misstatements of a balance or transaction, as follows: The risks may result from deficiencies in pervasive CIS activities such as program development and maintenance, systems software support, operations, physical CIS security, and control over access to special-privilege utility programs. These deficiencies would tend to have a pervasive impact on all application systems that are processed on the computer. The risks may increase the potential for errors or fraudulent activities in specific applications, in specific data bases, or in specific processing activities. For example, errors are not uncommon in systems that perform complex logic or calculations, or that must deal with many different exception conditions. 12. New CIS technologies are frequently employed by clients to build increasingly complex computer systems that may include micro-to-mainframe links, distributed data bases, and business management systems that feed information directly into the accounting systems. Such systems increase the overall sophistication of CIS and the complexity of the specific applications that they affect, thus increasing risk and require further consideration. Audit Procedures
audit firm should consider the CIS environment in designing audit procedures to reduce audit risk to an acceptably low level.
93
14. The auditors specific audit objectives do not change whether accounting data is processed manually or by computer. However, the methods of applying audit procedures to gather evidence may be influenced by the methods of computer processing. The auditor and the audit firm can use either manual audit procedures, computer-assisted audit techniques, or a combination of both to obtain sufficient evidential matter. However, in some accounting systems that use a computer for processing significant applications, it is relevant for the auditor to obtain adequate audit evidence with computer assistance.
94
Standard No 550 Related Parties
STANDARD 550 RELATED PARTIES (Issued in pursuance of the Minister of Finance Decision No. 195/2003/QD-BTC dated 28 November 2003) GENERAL 1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide guidance on the auditors responsibilities when performing audit procedures regarding related parties and transactions with such parties during the course of an audit of financial statements.
2. The auditor and the audit firm should perform audit procedures designed to obtain sufficient
appropriate audit evidence regarding the identification and disclosure by management of related parties and the effect of related party transactions that are material to the financial statements. However, an audit cannot be expected to detect all related party transactions. 3. As indicated in VSA 200 Objective and General Principles Governing an Audit of Financial Statements, in certain circumstances there are limitations that may affect the persuasiveness of evidence available to draw conclusions on particular financial statement assertions. Because of the degree of uncertainty associated with the financial statement assertions regarding the completeness of related parties, the procedures identified in this VSA will provide sufficient appropriate audit evidence regarding those assertions in the absence of any circumstance identified by the auditor that: a) increases the risk of misstatement beyond that which would ordinarily be expected; or b) indicates that a material misstatement regarding related parties has occurred. Where there is any indication that such circumstances exist, the auditor should perform modified, extended or additional procedures as are appropriate in the circumstances.
4.
This VAS applies to audits of financial statements and also applies to an audit of other financial information and related services rendered by the audit firm. The auditor and the audit firm shall comply with this VSA in conducting an audit of financial statements and rendering related services. It is expected that the client entity and users of the audit report should possess essential knowledge as to the objective and general principles set out in this VSA in exercising their responsibility, working with the auditor and the audit firm, and dealing with the relations maintained during the audit. In this VSA, the following terms have the meaning attributed below:
5. Related party: parties are considered to be related if one party has the ability to control the other party
or exercise significant influence over the other party in making financial and operating decisions.
6. Related party transactions: a transfer of resources or obligations between related parties, regardless of
whether a price is charged.
7. Significant influence represents the outcome of involvement in the development of financial and
operating policies of an entity rather than controlling these policies. Examples of significant influence include: - Representation on the Board of Management. - Participation in the policy making process. - Participation in material inter-company transactions. - Interchange on managerial personnel or independence of technical information. - Share ownership under statute or agreement. 8. Management is responsible for the identification and disclosure of related parties and transactions with such parties. This responsibility requires management to implement adequate accounting and internal control systems to ensure that transactions with related parties are appropriately identified in the
95
accounting records and disclosed in the financial statements. 9. The auditor needs to have a level of knowledge of the entitys business and industry that will enable identification of the events, transactions and practices that may have a material effect on the financial statements. While the existence of related parties and transactions between such parties are considered ordinary features of business, the auditor needs to be aware of them because: a) VAS Related parties may require disclosure in the financial statements of certain related party relationships and transactions. b) The existence of related parties or related party transactions may affect the financial statements. c) The reliability of audit evidence depends on the source (inside or outside) of this evidence and each circumstance. The auditors assessment of reliability should be based on the following principles: - A greater degree of reliance may be placed on audit evidence that is obtained from external resource than that from internal resource; - A greater degree of reliance may be placed on audit evidence that is obtained from internal resource as accounting and internal control systems effectively operate; - A greater degree of reliance may be placed on audit evidence that is obtained by the auditor than that provided by the entity. d) A related party transaction may be motivated by other than ordinary business considerations, for example, profit sharing or even fraud. CONTENTS OF THE VSA Existence and Disclosure of Related Parties 10. The auditor should review information provided by the directors and the Board of Management identifying the names of all known related parties and should perform the following procedures in respect of the completeness of this information: a) review prior year working papers for names of known related parties;
b) review the entitys procedures for identification of related parties; c) inquire as to the affiliation of the Board of Management members and directorsdirectors
and officers with other entities; d) review shareholder records to determine the names of principal shareholders or, if appropriate, obtain a listing of principal shareholders from the share register;
e) review minutes of the meetings of shareholders, directors and the Board of Management,
control department and other relevant statutory records such as capital contribution of members or shareholders; f) inquire of other auditors currently involved in the audit, or predecessor auditors, as to their knowledge of additional related parties; and
g) review the entitys income tax returns and other information supplied to regulatory
agencies. If, in the auditors judgment, the risk of significant related parties remaining undetected is low, these procedures may be modified as appropriate. 11. Where the VSA Related Parties requires disclosure of related party relationships, the auditor and the audit firm should be satisfied that the disclosure is adequate. Transactions with Related Parties 12. The auditor and the audit firm should review information provided by directors and the Board of Management identifying related party transactions and should be alert for other material related party transactions.
96
13. When obtaining an understanding of the accounting and internal control systems and making a preliminary assessment of control risk, the auditor and the audit firm should consider the adequacy of control procedures over the authorization and recording of related party transactions. 14. During the course of the audit, the auditor needs to be alert for transactions which appear unusual in the circumstances and may indicate the existence of previously unidentified related parties. Examples include: - Transactions which have abnormal terms of trade, such as unusual prices, interest rates, guarantees, and repayment terms. - Transactions which lack an apparent logical business reason for their occurrence. - Transactions in which substance differs from form. - Transactions processed in an unusual manner. - High volume or significant transactions with certain customers or suppliers as compared with others. - Unrecorded transactions such as the receipt or provision of management services at no charge. 15. During the course of the audit, the auditor and the audit firm carry out procedures which may identify the existence of transactions with related parties. Examples include: - Performing detailed tests of transactions and balances. - Reviewing minutes of meetings of the Board of Management and directors. - Reviewing accounting records for large or unusual transactions or balances, paying particular attention to transactions recognized at or near the end of the reporting period. - Reviewing confirmations of loans receivable and payable and confirmations from banks. Such a review may indicate guarantor relationship and other related party transactions. - Reviewing investment transactions, for example, purchase or sale of an equity interest in a joint venture or other entity. Examining Identified Related Party Transactions 16. In examining the identified related party transactions, the auditor and the audit firm should obtain sufficient appropriate audit evidence as to whether these transactions have been properly recorded and disclosed. 17. Given the nature of related party relationships, evidence of a related party transaction may be limited, for example, regarding the existence of inventory held by a related party on consignment. Because of such limited availability, the auditor would consider performing procedures such as: - Confirming the terms and amount of the transaction with the related party. - Inspecting evidence in possession of the related party. - Confirming or discussing information with persons associated with the transaction, such as banks, lawyers, guarantors and agents. Management Representations 18. The auditor and the audit firm should obtain a written representation from management concerning: a) the completeness of information provided regarding the identification of related parties; and b) the adequacy of related party disclosures in the financial statements. Audit Conclusions and Reporting If the auditor and the audit firm are unable to obtain sufficient appropriate audit evidence concerning related parties and transactions with such parties or concludes that their disclosure in the financial statements is not adequate, the auditor should modify the audit report appropriately./.
97
Standard No 570 Going concern
STANDARD 570 GOING CONCERN (Issued in pursuance of the Minister of Finance Decision No. 195/2003/QD-BTC dated 28 November 2003) general 1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide guidance on the responsibilities of the auditor and the audit firm in the audit of financial statements regarding the appropriateness of the going concern assumption as a basis for the preparation of the financial statements including managements assessments of going concern of the entity. 2. When planning and performing audit procedures and in evaluating the results thereof, the auditor and the audit firm should consider the appropriateness of the going concern assumption underlying the preparation of the financial statements.
3. This VAS applies to audits of financial statements and also applies to an audit of other financial
information and related services rendered by the audit firm. The auditor and the audit firm should comply with this VSA in conducting an audit of financial statements. It is expected that the audited (client) entity and users of the audit report should possess essential knowledge as to the objective and general principles set out in this VSA in working with the auditor and the audit firm and in using the audit results properly. In this VSA, the following terms have the meaning attributed below:
4. Going concern: An entity is assumed as a going concern for the foreseeable future, normally not
exceeding one year after period end, that is, the entity is assumed to have neither the intention nor the need to liquidate or curtail materially the scale of its operations, or seek protection from creditors in accordance with relevant laws and prevailing regulations. CONTENTS OF THE VSA Managements Responsibility
5.
The going concern assumption is the basic principles for preparation and disclosures of financial statements. Accordingly, assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business.
6. Vietnamese Accounting Standard (VAS) 01 "Frameworks" requires that management of the audited entity should specifically review and assess the entitys ability to continue business as a going concern and other accounting standards regulate issues to be considered and disclosed in relation to the entitys continuance as a going concern. Accounting Standards Presentation of Financial Statements states When preparing financial statements, management should make an assessment of an enterprises ability to continue as a going concern. Financial statements should be prepared on a going concern basis unless management intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions which may cast significant doubt upon the enterprises ability to continue as a going concern, those uncertainties should be disclosed. When the financial statements are not prepared on a going concern basis, that fact should be disclosed, together with the basis on which the financial statements are prepared and the reasons why the enterprise is not considered to be a going concern. In assessing whether the going concern assumption is appropriate, management takes into account all available information for the foreseeable future, which should be at least, but is not limited to, twelve months from the balance sheet date. The degree of consideration depends on the facts in each case.
98
When an enterprise has a history of profitable operations and ready access to financial resources, a conclusion that the going concern basis of accounting is appropriate can be reached without detailed analysis. In other cases, management may need to consider a wide range of factors surrounding current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate. 7. Managements assessment of the going concern assumption involves making a judgment, at a particular point in time, about the future outcome of events or conditions which are inherently uncertain. The following factors are relevant: the degree of uncertainty associated with the outcome of an event or condition increases significantly the further into the future a judgment is being made about the outcome of an event or condition. For that reason, most financial reporting frameworks that require an explicit management assessment specify the period for which management is required to take into account all available information. Any judgment about the future is based on information available at the time at which the judgment is made. Subsequent events can contradict a judgment which was reasonable at the time it was made. The size and complexity of the entity, the nature and condition of its business and the degree to which it is affected by external factors all affect the judgment regarding the outcome of events or conditions.
8. Examples of events or conditions, which individually or collectively may cast significant doubt about the going concern assumption are set out below. Financial indications Net liability or net current liability position; Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short-term borrowings to finance long-term asset; Indications of withdrawal of financial support by debtors and other creditors; Negative operating cash flows indicated by historical or prospective financial statements. Adverse key financial ratios; Substantial operating losses or significant deterioration in the value of assets used to generate cash flows; Arrears or discontinuance of dividends; Inability to pay creditors on due dates; Inability to comply with the terms of loan agreements; Change from credit to cash-on-delivery transactions with suppliers; and, Inability to obtain financing for essential new product development or other essential investments Operating indications Loss of key management without replacement; Loss of a major market, franchise, license, or principal supplier; and, Labor difficulties or shortages of important supplies. Other indications Non-compliance with capital or other statutory requirements; Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that are unlikely to be satisfied; Changes in legislation or government policy expected to adversely affect the entity; and, Other indications. The significance of such events or conditions often can be mitigated by other factors. For example,
99
the effect of an entity being unable to make its normal debt repayments may be counter-balanced by management's plans to maintain adequate cash flows by alternative means, such as by disposal of assets, rescheduling of loan repayments, or obtaining additional capital. Similarly, the loss of a principal supplier may be mitigated by the availability of a suitable alternative source of supply. Responsibility of the Auditor and the Audit Firm 9. The auditor and audit firms responsibility is to consider the appropriateness of managements use of the going concern assumption in the preparation of the financial statements, and consider whether there are material uncertainties about the entitys ability to continue as a going concern that need to be disclosed in the financial statements. 10. The auditor and the audit firm cannot predict future events or conditions that may cause an entity to cease to continue as a going concern. Accordingly, the absence of any reference to going concern uncertainty in an auditors report cannot be viewed as a guarantee as to the entitys ability to continue as a going concern. Planning Considerations 11. In planning the audit, the auditor and the audit firm should consider whether there are events or conditions which may cast significant doubt on the entitys ability to continue as a going concern. 12. The auditor and the audit firm should remain alert for evidence of events or conditions which may cast significant doubt on the entitys ability to continue as a going concern throughout the audit. If such events or conditions are identified, the auditor should, in addition to performing the procedures in paragraph 26, consider whether they affect the auditor and audit firms assessments of the components of audit risk. 13. The auditor and the audit firm consider events and conditions relating to the going concern assumption during the planning process, because this consideration allows for more timely discussions with management, review of managements plans and resolution of any identified going concern issues. 14. In some cases, management may have already made a preliminary assessment at the early stages of the audit. If so, the auditor and the audit firm review that assessment to determine whether management has identified events or conditions, such as those discussed in paragraph 8, and managements plans to address them. 15. If management has not yet made a preliminary assessment, the auditor discusses with management the basis for their intended use of the going concern assumption, and inquires of management whether events or conditions, such as those discussed in paragraph 8, exist. The auditor may request management to begin making its assessment, particularly when the auditor has already identified events or conditions relating to the going concern assumption. 16. The auditor and the audit firm consider the effect of identified events or conditions when making preliminary assessments of the components of audit risk and, therefore, their existence may affect the nature, timing and extent of the audit procedures. Evaluating Managements Assessment 17. The auditor and the audit firm should evaluate managements assessment of the entitys ability to continue as a going concern. 18. The auditor and the audit firm should consider the same period as that used by management in making its assessment under the financial reporting framework. If managements assessment of the entitys ability to continue as a going concern covers less than twelve months from the balance sheet date, the auditor should ask management to extend its assessment period to twelve months from the balance sheet date. 19. Managements assessment of the entitys ability to continue as a going concern is a key part of the auditors consideration of the going concern assumption. The period for which management is required to
100
take into account all available information should be at least, but is not limited to, twelve months from the balance sheet date. 20. In evaluating managements assessment, the auditor and the audit firm consider the process management followed to make its assessment, the assumptions on which the assessment is based and managements plans for future action. The auditor and the audit firm consider whether the assessment has taken into account all relevant information of which the auditor and the audit firm are aware as a result of the audit procedures. 21. As noted in paragraph 06, when there is a history of profitable operations and a ready access to financial resources, management may make its assessment without detailed analysis. In such circumstances, the auditor and audit firms conclusion about the appropriateness of this assessment normally is also made without the need for performing detailed procedures. When events or conditions have been identified which may cast significant doubt about the entitys ability to continue as a going concern, however, the auditor performs additional audit procedures, as described in paragraph 26. Period Beyond Managements Assessment 22. The auditor and the audit firm should inquire of management as to its knowledge of events or conditions beyond the period of assessment used by management that may cast significant doubt on the entitys ability to continue as a going concern. 23. The auditor and the audit firm are alert to the possibility that there may be known events, scheduled or otherwise, or conditions that will occur beyond the period of assessment used by management that may bring into question the appropriateness of managements use of the going concern assumption in preparing the financial statements. The auditor and the audit firm may become aware of such known events or conditions during the planning and conduct of the audit, including subsequent events procedures. 24. Since the degree of uncertainty associated with the outcome of an event or condition increases as the event or condition is further into the future, in considering such events or conditions, the indications of going concern issues will need to be significant before the auditor and the audit firm consider taking further action. The auditor may need to ask management to determine the potential significance of the event or condition on their going concern assessment. 25. The auditor and the audit firm do not have a responsibility to design procedures other than inquiry of management to test for indications of events or conditions which cast significant doubt on the entitys ability to continue as a going concern beyond the period assessed by management which, as discussed in paragraph 18, would be at least twelve months from the balance sheet date. Additional Audit Procedures When Events or Conditions are Identified 26. When events or conditions have been identified which may cast significant doubt on the entitys ability to continue as a going concern, the auditor and the audit firm should: a) review managements plans for future actions based on its going concern assessment; b) gather sufficient appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists through carrying out procedures considered necessary, including considering the effect of any plans of management and other mitigating factors; and c) seek written representations from management regarding its plans for future action. 27. Events or conditions which may cast significant doubt on the entitys ability to continue as a going concern may be identified during the planning of the engagement or in the course of performing audit procedures. The process of considering events or conditions continues as the audit progresses. When the auditor believes such events or conditions may cast significant doubt on the entitys ability to continue as a going concern, certain procedures may take on added significance. The auditor and the audit firm inquire of management as to its plans for future action, including its plans to liquidate assets, borrow money or restructure debt, reduce or delay expenditures, or increase capital. The auditor and the audit firm also consider whether any additional facts or information are available since the date on which management made its assessment. The auditor obtains sufficient appropriate audit evidence that managements plans are feasible and that the outcome of these plans will improve
101
the situation. 28. Procedures that are relevant in this regard may include: Analyzing and discussing cash flow, profit and other relevant forecasts with management. Analyzing and discussing the entity's latest available interim financial statements. Reviewing the terms of debentures and loan agreements and determining whether any have been breached. Reading minutes of the meetings of shareholders, Board of Management and Directors and important committees for reference to financing difficulties. Inquiring of the entity's lawyer regarding the existence of litigation and claims and the reasonableness of managements assessments of their outcome and the estimate of their financial implications. Confirming the existence, legality and enforceability of arrangements to provide or maintain financial support with related and third parties and assessing the financial ability of such parties to provide additional funds. Considering the entity's plans to deal with unfilled customer orders. Reviewing events after period end to identify those that either mitigate or otherwise affect the entity's ability to continue as a going concern. 29. When analysis of cash flow is a significant factor in considering the future outcome of events or conditions the auditor considers: the reliability of the entity's system for generating such information, and; whether there is adequate support for the assumptions underlying the forecast. In addition the auditor and the audit firm compare: the prospective financial information for recent prior periods with historical results, and the prospective financial information for the current period with results achieved to. Audit Conclusions and Reporting 30. Based on the audit evidence obtained, the auditor and the audit firm should determine if, in the auditors judgment, a material uncertainty exists related to events or conditions that alone or in aggregate, may cast significant doubt on the entitys ability to continue as a going concern. 31. A material uncertainty exists when the magnitude of its potential impact is such that, in the auditor and audit firms judgment, clear disclosure of the nature and implications of the uncertainty is necessary for the presentation of the financial statements not to be misleading. Going Concern Assumption Appropriate but a Material Uncer- tainty Exists 32. If the use of the going concern assumption is appropriate but a material uncertainty exists, the auditor considers whether the financial statements: a) adequately describe the principal events or conditions that give rise to the significant doubt on the entity's ability to continue in operation and managements plans to deal with these events or conditions. b) state clearly that there is a material uncertainty related to events or conditions which may cast significant doubt on the entitys ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.
33. If adequate disclosure is made in the financial statements, the auditor and the audit firm should
express an unqualified opinion but modify the auditor's report by adding an emphasis of matter paragraph that highlights the existence of a material uncertainty relating to the event or condition that may cast significant doubt on the entitys ability to continue as a going concern and draws attention to the note in the financial statements that discloses the matters set out in paragraph 32. 34. In assessing the adequacy of the financial statement disclosure, the auditor considers whether the information explicitly draws the readers attention to the possibility that the entity may be unable to
102
continue realizing its assets and discharging its liabilities in the normal course of business. The following is an example of such a paragraph when the auditor is satisfied as to the adequacy of the note disclosure: Without qualifying our opinion, we draw attention to Note X in the financial statements which indicates that the Company incurred a net loss of ZZZ during the year ended December 31, 20X0 and, as of that date, the Companys current liabilities exceeded its total assets by ZZZ. These conditions, along with other matters as set forth in Note X, indicate the existence of a material uncertainty which may cast significant doubt about the Companys ability to continue as a going concern. In extreme cases, such as situations involving multiple material uncertainties that are significant to the financial statements, the auditor and the audit firm may consider it appropriate to express a disclaimer of opinion instead of adding an emphasis of matter paragraph.
35. If adequate disclosure is not made in the financial statements, the auditor and the audit firm should
express a qualified or adverse opinion, as appropriate, following VSA 700 The Auditors Report on Financial Statements. The report should include specific reference to the fact that there is a material uncertainty that may cast significant doubt about the entitys ability to continue as a going concern. The following is an example of the relevant paragraphs when a qualified opinion is to be expressed: The Companys financing arrangements expire and amounts outstanding are payable on March 19, 20X1. The Company has been unable to re-negotiate or obtain replacement financing. This situation indicates the existence of a material uncertainty which may cast significant doubt on the Companys ability to continue as a going concern and therefore it may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements (and notes thereto) do not disclose this fact. In our opinion, except for the omission of the information included in the preceding paragraph, the financial statements give a true and fair view of (present fairly, in all material respects,) the financial position of the Company at December 31, 20X0 and the results of its operations and its cash flows for the year then ended in accordance with. The following is an example of the relevant paragraphs when an adverse opinion is to be expressed: The Companys financing arrangements expired and the amount outstanding was payable on December 31, 20X0. The Company has been unable to re-negotiate or obtain replacement financing and is considering filing for bankruptcy. These events indicate a material uncertainty which may cast significant doubt on the Companys ability to continue as a going concern and therefore it may be unable to realize its assets and discharge its liabilities in the normal course of business. The financial statements (and notes thereto) do not disclose this fact. In our opinion, because of the omission of the information mentioned in the preceding paragraph, the financial statements do not give a true and fair view of (or do not present fairly) the financial position of the Company as at December 31, 20X0, and of its results of operations and its cash flows for the year then ended in accordance with (and do not comply with) Going Concern Assumption Inappropriate
36. If, in the judgment of the auditor and the audit firm, the entity will not be able to continue as a
going concern, the auditor and the audit firm should express an adverse opinion if the financial statements have been prepared on a going concern basis. If, on the basis of the additional procedures carried out and the information obtained, including the effect of managements plans, the auditor's judgment is that the entity will not be able to continue as a going concern, the auditor concludes, regardless of whether or not disclosure has been made, that the going concern assumption used in the preparation of the financial statements is inappropriate and expresses an adverse opinion. 37. When the entitys management has concluded that the going concern assumption used in the preparation of the financial statements is not appropriate, the financial statements need to be prepared
103
on an alternative authoritative basis. If on the basis of the additional procedures carried out and the information obtained the auditor and the audit firm determine the alternative basis is appropriate, the auditor and the audit firm can issue an unqualified opinion if there is adequate disclosure but may require an emphasis of matter in the auditors report to draw the users attention to that basis. Management Unwilling to Make or Extend its Assessment
38. If management is unwilling to make or extend its assessment when requested to do so by the
auditor and the audit firm, the auditor and the audit firm should consider the need to modify the auditors report as a result of the limitation on the scope of the auditors work. In certain circumstances, such as those described in paragraphs 15, 18 and 24, the auditor and the audit firm may believe that it is necessary to ask management to make or extend its assessment. If management is unwilling to do so, it is not the auditor and audit firms responsibility to rectify the lack of analysis by management, and a modified report may be appropriate because it may not be possible for the auditor and the audit firm to obtain sufficient appropriate evidence regarding the use of the going concern assumption in the preparation of the financial statements.
39. In some circumstances, the lack of analysis by management may not preclude the auditor and the
audit firm from being satisfied about the entitys ability to continue as a going concern. For example, the auditors other procedures may be sufficient to assess the appropriateness of managements use of the going concern assumption in the preparation of the financial statements because the entity has a history of profitable operations and a ready access to financial resources. In other circumstances, however, the auditor and the audit firm may not be able to confirm or dispel, in the absence of managements assessment, whether or not events or conditions exist which indicate there may be a significant doubt on the entitys ability to continue as a going concern, or the existence of plans management has put in place to address them or other mitigating factors. In these circumstances, the auditor and the audit firm modify the auditors report as discussed in VSA 700 The Auditors Report on Financial Statements. Significant Delay in the Signature or Approval of Financial Statements When there is significant delay in the signature or approval of the financial statements by management after the balance sheet date, the auditor and the audit firm consider the reasons for the delay. When the delay could be related to events or conditions relating to the going concern assessment, the auditor and the audit firm consider the need to perform additional audit procedures, as described in paragraph 26, as well as the effect on the auditor and audit firms conclusion regarding the existence of a material uncertainty, as described in paragraph 30.
104
Standard No 800 The auditors report on special purpose audit engagements
STANDARD 800 THE AUDITORS REPORT ON SPECIAL PURPOSE AUDIT ENGAGEMENTS (Issued in pursuance of the Minister of Finance Decision No. 195/2003/QD-BTC dated 28 November 2003) GENERAL 1. The purpose of this Vietnamese Standards on Auditing (VSA) is to establish standards and provide guidance in connection with special purpose audit engagements including: a) Financial statements prepared in accordance with a comprehensive basis of accounting other than Vietnamese Accounting Standards or other accounting standards accepted in Vietnam; b) Specified accounts, elements of accounts, or items in a financial statement (hereafter referred to as reports on a component of financial statements); c) Compliance with contractual agreements; and d) Summarized financial statements. 2. The auditor should review and assess the conclusions drawn from the audit evidence obtained during the special purpose audit engagement as the basis for an expression of opinion. The report should contain a clear written expression of opinion.
3. This VAS applies to audits of special purpose audit engagements rather than review of financial
statements and examination of financial information on an agreed procedure basis or combination of financial information. The auditor and the audit firm should comply with this VSA in conducting an audit and preparing auditors reports on a special purpose audit engagements. CONTENTS OF THE VSA General Considerations
4. The nature, timing and extent of work to be performed in a special purpose audit engagement will
vary with the circumstances. Before undertaking a special purpose audit engagement, the auditor should ensure there is agreement with the client as to the exact nature of the engagement and the form and content of the report to be issued. 5. In planning the audit work, the auditor will need a clear understanding of the purpose of using the information under audit, and who is likely to use it. To avoid the possibility of the auditors report being used for purposes for which it was not intended, the auditor may wish to indicate in the report any restrictions on its distribution and use.
6. The auditors report on a special purpose audit engagement, except for a report on summarized
financial statements, should include the following basic elements, ordinarily in the following layout: a) b) c) d) Name and address of the audit firm; Report number; Report title; Addressee; opening or introductory paragraph: - identification of the financial information audited; and - a statement of the responsibility of the entitys director (or leader) and the responsibility of the auditor and the audit firm; a scope paragraph: the reference to the VSAs applicable to special purpose audit engagements; and
e)
f)
105
g) h) i)
a description of the work the auditor performed;
opinion paragraph containing an expression of opinion by the auditor and the audit firm on the financial information; Issue place and date of the report; Signature and seal.
A measure of uniformity in the form and content of the auditors report is desirable because it helps to promote the readers understanding.
7. In the case of financial information to be supplied by an entity to government authorities, relevant

organizations and individuals, insurers and other third party entities there may be a prescribed format for the auditors report. Such prescribed reports may not conform to the requirements of this VSA. For example, the prescribed report may require a certification of fact when an expression of opinion is appropriate, may require an opinion on matters outside the scope of the audit or may omit essential wording. In such circumstances, the auditor should consider the substance and wording of the prescribed report and, when necessary, should make appropriate changes to conform to the requirements of this VSA, either by rewording the form or by attaching a separate report. 8. When the information on which the auditor has been requested to report is based on the provisions of an agreement, the auditor needs to consider whether any significant interpretations of the agreement have been made by management in preparing the information. An interpretation is significant when adoption of another reasonable interpretation would have produced a material difference in the financial information.
9. The auditor should consider whether any significant interpretations of an agreement on which the
financial information is based are clearly disclosed in the financial information. The auditor may wish to make reference in the auditors report on the special purpose audit engagement to the note within the financial information that describes such interpretations. Reports on Financial Statements Prepared in Accordance with a Comprehensive Basis of Accounting other than Vietnamese Accounting Standards or other standards accepted in Vietnam. 10. A comprehensive basis of accounting comprises a set of criteria used in preparing financial statements which applies to all material items and which has substantial support. Financial statements may be prepared for a special purpose in accordance with a comprehensive basis of accounting other than Vietnamese Accounting Standards or relevant standards accepted in Vietnam (referred to herein as an other comprehensive basis of accounting). A conglomeration of accounting conventions devised to suit individual preference is not a comprehensive basis of accounting. Other comprehensive financial reporting frameworks may include: That used by an entity to prepare its income tax return; The cash receipts and disbursements basis of accounting; and, The financial reporting provisions of a government regulatory agency.
11. The auditors report on financial statements prepared in accordance with another
comprehensive basis of accounting should include a statement that indicates the basis of accounting used or should refer to the note to the financial statements giving that information. The opinion should state whether the financial statements are prepared, in all material respects, in accordance with the identified basis of accounting. The terms used to express the auditors opinion should be either give a true and fair view or present fairly, in all material respects,. Appendix 01 to this VSA gives examples of auditors reports on financial statements prepared in accordance with another comprehensive basis of accounting.
12. The auditor would consider whether the title of, or a note to, the financial statements makes it clear to
the reader that such statements are not prepared in accordance with Vietnamese Accounting Standards or International Accounting Standards accepted in Vietnam. For example, a tax basis financial statement might be entitled Statement of Income and Expenses-Income Tax Basis. If the
106
financial statements prepared on another comprehensive basis are not suitably titled or the basis of accounting is not adequately disclosed, the auditor should not issue an unqualified report. Reports on a Component of Financial Statements
13. The auditor may be requested to express an opinion on one or more components of financial
statements, for example, accounts receivable, inventory, or a provision. This type of engagement may be undertaken as a separate engagement or in conjunction with an audit of the entitys financial statements. However, this type of engagement does not result in a report on the financial statements taken as a whole and, accordingly, the auditor would express an opinion only as to whether the component audited is prepared, in all material respects, in accordance with the identified basis of accounting.
14. Many financial statement items are interrelated, for example, sales and receivables, and inventory and
payables. Accordingly, when reporting on a component of financial statements, the auditor will need to examine certain other financial information. In determining the scope of the engagement, the auditor should consider those financial statement items that are interrelated and which could materially affect the information on which the audit opinion is to be expressed.
15. The auditor should consider the concept of materiality in relation to the component of financial
statements being reported upon. For example, a particular account balance provides a smaller base against which to measure materiality compared with the financial statements taken as a whole. Consequently, the auditors examination will ordinarily be more extensive than if the same component were to be audited in connection with a report on the entire financial statements.
16. The auditor would advise the client that the auditors report on a component of financial statements is
not to accompany the financial statements of the entity.
17. The auditors report on a component of financial statements should include a statement that
indicates the basis of accounting in accordance with which the component is presented. The opinion should state whether the component is prepared, in all material respects, in accordance with the identified basis of accounting. Appendix 02 to this VSA gives examples of 2 types of audit reports on components of financial statements.
18. When an adverse opinion or disclaimer of opinion on the entire financial statements has been
expressed, the auditor should report on components of the financial statements only if those components are not so extensive as to constitute a major portion of the financial statements. To do otherwise may overshadow the report on the entire financial statements. Reports on Compliance with Contractual Agreements
19. The auditor may be requested to report on an entitys compliance with certain aspects of contractual
agreements (non-audit agreements), such as bond indentures or loan agreements. Such agreements ordinarily require the entity to comply with a variety of covenants involving such matters as payments of interest, restriction of dividend payments and the use of the proceeds of sales of property.
20. Engagements to express an opinion as to an entitys compliance with contractual agreements

should be undertaken only when the overall aspects of compliance relate to accounting and financial matters within the scope of the auditors professional competence. However, when there are particular matters forming part of the engagement that are outside the auditors expertise, the auditor would consider using the work of an expert.
21. The report should state whether, in the auditors opinion, the entity has complied with the
particular provisions of the agreement. Appendix 03 to this VSA gives examples of 2 types of auditors reports on compliance given in a separate report and in a report accompanying financial statements. Reports on Summarized Financial Statements
107
22. An entity may prepare financial statements summarizing its annual audited financial statements for
the purpose of informing user groups interested in the highlights only of the entitys financial position and the results of its operations. Unless the auditor has expressed an audit opinion on the financial statements from which the summarized financial statements were derived, the auditor should not report on summarized financial statements.
23. Summarized financial statements are presented in considerably less detail than annual audited financial
statements. Therefore, such financial statements need to clearly indicate the summarized nature of the information and caution the reader that, for a better understanding of an entitys financial position and the results of its operations, summarized financial statements are to be read in conjunction with the entitys most recent audited financial statements.
24. Summarized financial statements need to be appropriately titled to identify the audited financial
statements from which they have been derived, for example, Summarized Financial Information Prepared from the Audited Financial Statements for the Year Ended December 31, X.
25. Summarized financial statements do not contain all the information required by the financial reporting
framework used for the annual audited financial statements. Consequently, wording such as true and fair or present fairly, in all material respects, is not used by the auditor when expressing an opinion on summarized financial statements.
26. The auditors report on summarized financial statements should include the following basic
elements ordinarily in the following layout:
a) Name and address of the audit firm;

b) c) d) e) Report number; Report title; Addressee; an identification of the audited financial statements from which the summarized financial statements were derived; f) a reference to the date of the audit report on the unabridged financial statements and the type of opinion given in that report; g) an opinion as to whether the information in the summarized financial statements is consistent with the audited financial statements from which it was derived. When the auditor has issued a modified opinion on the unabridged financial statements yet is satisfied with the presentation of the summarized financial statements, the audit report should state that the summarized financial statements were derived from financial statements on which a modified audit report was issued;
h) a statement, or reference to the note within the summarized financial statements, which
indicates that for a better understanding of an entitys financial performance and position and of the scope of the audit performed, the summarized financial statements should be read in conjunction with the unabridged financial statements and the audit report thereon;
i) issue place and date of the report; j) signature and seal.

Appendix 04 to this VSA gives examples of 2 types of auditors reports on summarized financial statements. Appendix 1 - Examples of Reports on Financial Statements Prepared in Accordance with a Comprehensive Basis of Accounting other than Vietnamese Accounting Standards XYZ AUDIT FIRM Address, tel. and fax no. ... No. ... AUDITORS REPORT ON Form 01
108
A STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS FOR THE YEAR ENDED... OF ABC COMPANY To: The Board of Management and Directors of ABC Company We (*) have audited the accompanying statement of ABC Companys cash receipts and disbursements for the year ended December 31, X prepared on 9date) on pages... to... This statement is the responsibility of ABC Companys management. Our responsibility is to express an opinion on the accompanying statement based on our audit. Basis of Opinion We conducted our audit in accordance with Vietnamese Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the current (or accepted) accounting standards and regulations; accounting principles and methods used and significant estimates and judgments made by management as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion. The Companys policy is to prepare the accompanying statement on the cash receipts and disbursements basis. On this basis, revenue is recognized when received rather than when earned, and expenses are recognized when paid rather than when incurred. Opinion In our opinion, the accompanying statement gives a true and fair view of (or presents fairly, in all material respects,) the revenue collected and expenses paid by the Company during the year ended December 31, X in accordance with the cash receipts and disbursements basis as described in Note X. XYZ AUDIT FIRM ..., day... month ...year ... Director Auditor (Full name, signature, seal) (Full name, signature) CPA Certificate No. ... CPA Certificate No. ... (*) It may be relevant to specify the name of XYZ Audit Firm XYZ AUDIT FIRM Address, tel. and fax no. ... No. ... Form 02
AUDITORS REPORT ON FINANCIAL STATEMENTS PREPARED ON INCOME TAX BASIS OF ABC COMPANY FOR THE YEAR ENDED To: The Board of Management and Directors of ABC Company We (*) have audited the accompanying income tax basis financial statements of ABC Company for the year ended December 31, X prepared on (date) on pages... to... These statements are the responsibility of ABC Companys management. Our responsibility is to express an opinion on the financial statements based on our audit. Basis of Opinion We conducted our audit in accordance with Vietnamese Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the current (or accepted) accounting standards and regulations; accounting principles and methods used and significant estimates and judgments made by management as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion.
109
Opinion In our opinion, the financial statements give a true and fair view of (or present fairly, in all material respects,) the financial position of the Company as of December 31, X and its income and expenses for the year then ended, in accordance with the basis of accounting used for income tax purposes as described in Note X. XYZ AUDIT FIRM Director (Full name, signature, seal) CPA Certificate No. ... ..., day... month ... year ... Auditor (Full name, signature) CPA Certificate No. ...
(*) It may be relevant to specify the name of XYZ Audit Firm Appendix 2 - Examples of Reports on Components of Financial Statements XYZ AUDIT FIRM Address, tel. and fax no. ... No. ... Form 01
AUDITORS REPORT ON SCHEDULE OF ACCOUNTS RECEIVABLE OF ABC COMPANY FOR THE YEAR ENDED... To: The Board of Management and Directors of ABC Company We (*) have audited the accompanying schedule of accounts receivable of ABC Company for the year ended December 31, X prepared on (date) on pages to ... This schedule is the responsibility of ABC Companys management. Our responsibility is to express an opinion on the schedule based on our audit. Basis of Opinion We conducted our audit in accordance with Vietnamese Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the current (or accepted) accounting standards and regulations; accounting principles and methods used and significant estimates and judgments made by management as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion. (Where the financial statements of the Company for the same year have been audited, the auditor should state that fact as expressing an opinion thereon and where they have not, that fact shouls also be disclosed). Opinion In our opinion, the schedule of accounts receivable gives a true and fair view of (or presents fairly, in all material respects,) the accounts receivable of the Company as of December 31, X in accordance with the current Vietnamese Accounting Standards and Regulations and other relevant legislation. (This report is not attached to the financial statements). XYZ AUDIT FIRM Director (Full name, signature, seal) CPA Certificate No. ... ..., day ... month ... year ... Auditor (Full name, signature) CPA Certificate No. ...
(*) It may be relevant to specify the name of XYZ Audit Firm
110
XYZ AUDIT FIRM Address, tel. and fax no. ... No. ...
Form 02
AUDITORS REPORT ON SCHEDULE OF PROFIT PARTICIPATION OF ABC COMPANY FOR THE YEAR ENDED... To: The Board of Management and Directors of ABC Company We (*) have audited the accompanying schedule of DEFs profit participation for the year ended December 31, X prepared on (date) on pages ... to ... This schedule is the responsibility of ABC Companys management. Our responsibility is to express an opinion on the schedule based on our audit. Basis of Opinion We conducted our audit in accordance with Vietnamese Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the current (or accepted) accounting standards and regulations; accounting principles and methods used and significant estimates and judgments made by management as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion. (Where the financial statements of the Company for the same year have been audited, the auditor should state that fact as expressing an opinion thereon and where they have not, that fact shouls also be disclosed). Opinion In our opinion, the schedule of profit participation gives a true and fair view of (or presents fairly, in all material respects,) DEFs participation in the profits of the Company for the year ended December 31, X in accordance with Vietnamese Accounting Regulations, relevant legislation and the provisions of the employment agreement between DEF and the Company dated.... (This report is not attached to the financial statements.) XYZ AUDIT FIRM Director (Full name, signature, seal) CPA Certificate No. ... ..., day ... month ...year ... Auditor (Full name, signature) CPA Certificate No. ...
111
Appendix 3 - Examples of Reports on Compliance with Provisions of Indenture XYZ AUDIT FIRM Address, tel. and fax no. ... No. ... Form 01: Separate report
AUDITORS REPORT ON REPORTS ON COMPLIANCE WITH LOAN AGREEMENTS BY ABC COMPANY To: The Board of Management and Directors of ABC Company We (*) have audited ABC Companys compliance with the interest payment provisions set out in sections X to XX of Loan Agreement dated May 15, 19X1 with DEF Bank. Basis of Opinion We conducted our audit in accordance with Vietnamese Standards on Auditing applicable to compliance auditing of contractual agreements. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether ABC Company has complied with the relevant sections of the Loan Agreement. An audit includes examining appropriate evidence, on a test basis, as to payment of loan interest disclosed in the financial statements and such other testing procedures considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Opinion In our opinion as of December 31, 20X1, the Company was, in all material respects, in compliance with the interest payment provisions of the Indenture dated May 15, 19X1 with DEF Bank. (This report is not attached to the financial statements). XYZ AUDIT FIRM Director (Full name, signature, seal) CPA Certificate No. ... ..., day ... month ... year ... Auditor (Full name, signature) CPA Certificate No. ...
(*) It may be relevant to specify the name of XYZ Audit Firm XYZ AUDIT FIRM Form 02: Report Accompanying Address, tel. and fax no. ... Financial Statements No. ... AUDITORS REPORT ON REPORTS ON COMPLIANCE WITH LOAN AGREEMENTS BY ABC COMPANY To: The Board of Management and Directors of ABC Company We (*) have audited the accompanying balance sheet of ABC Company as of December 31, 20X1, and the related statements of income, and cash flows for the year then ended (on pages... to...) prepared on (date). These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit. We have also audited ABC Companys compliance with the provisions set out in sections X to XX of Loan agreement dated May 15, 19X1 with DEF Bank. Basis of Opinion We conducted our audits in accordance with Vietnamese Standards on Auditing applicable to the audit of financial statements and to compliance auditing. Those Standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and about whether ABC Company has complied with the relevant sections of the Indenture.
112
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Opinion In our opinion: (a) the accompanying financial statements give a true and fair view of (or present fairly, in all material respects,) the financial position of the Company as of December 31, 20X1, and of the results of its operations and its cash flows for the year then ended in accordance with ... (and comply with ...); and (b) the Company was, in all material respects, in compliance with the interest payment provisions of Loan Agreement dated May 15, 19X1 with DEF Bank. XYZ AUDIT FIRM Director (Full name, signature, seal) CPA Certificate No. ... ..., day ... month ... year ... Auditor (Full name, signature) CPA Certificate No. ...

Appendix 4 - Examples of Reports on Summarized Financial Statements XYZ AUDIT FIRM Address, tel, and fax no. ... No. ... Form 01: When an Unqualified Opinion Was Expressed on the Annual Audited Financial Statements
AUDITORS REPORTS ON SUMMARIZED FINANCIAL STATEMENTS OF ABC COMPANY To: The Board of Management and Directors of ABC Company We (*) have audited the financial statements of ABC Company for the year ended December 31, 20X1 prepared on (date) in accordance with Vietnamese Standards on Auditing, from which the summarized financial statements on pages... to... were derived. In our audit report dated March 10, 20X0 we expressed an unqualified opinion on the financial statements from which the summarized financial statements were derived. Opinion In our opinion, the accompanying summarized financial statements are consistent, in all material respects, with the financial statements from which they were derived. For a better understanding of the Companys financial position and the results of its operations for the period and of the scope of our audit, the summarized financial statements should be read in conjunction with the financial statements from which the summarized financial statements were derived and our audit report thereon. (This report is attached to the audited summarized financial statements). XYZ AUDIT FIRM Director (Full name, signature, seal) CPA Certificate No. ... ..., day ... month ... year ... Auditor (Full name, signature) CPA Certificate No. ...
113
(*) It may be relevant to specify the name of XYZ Audit Firm XYZ AUDIT FIRM Form 02: When a Qualified Address, tel. and fax no. ... Opinion Was Expressed No. on the Annual Audited Financial Statements AUDITORS REPORTS ON SUMMARIZED FINANCIAL STATEMENTS To: The Board of Management and Directors of ABC Company We have audited the financial statements of ABC Company for the year ended December 31, 20X1 prepared on (date) in accordance with Vietnamese Standards on Auditing, from which the summarized financial statements on page to were derived. In our audit report dated March 10, 20X2 we expressed an opinion that the financial statements from which the summarized financial statements were derived gave a true and fair view of (or presented fairly, in all material respects,) except that inventory had been overstated. Basis of Opinion In our opinion, the accompanying summarized financial statements are consistent, in all material respects, with the financial statements from which they were derived and on which we expressed a qualified opinion. For a better understanding of the Companys financial position and the results of its operations for the period and of the scope of our audit, the summarized financial statements should be read in conjunction with the financial statements from which the summarized financial statements were derived and our audit report thereon. (This report is attached to the audited summarized financial statements). XYZ AUDIT FIRM Director (Full name, signature, seal) CPA Certificate No. ... ..., day ... month ... year ... Auditor (Full name, signature) CPA Certificate No. ...
114
Standard No 910 Engagements to review financial statements
STANDARD 910 ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS (Issued in pursuance of the Minister of Finance Decision No. 195/2003/QD-BTC dated 28 November 2003) general
1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide
guidance on the professional responsibilities of the auditor and the audit firm when an engagement to review financial statements is undertaken and on the form and content of the report that the auditor issues in connection with such a review.
2. This VSA is directed towards the review of financial statements. However, it is to be applied to the
extent practicable to engagements to review financial or other information. The auditor and the audit firm should comply with this VSA in conducting engagements to review financial statements and finance and accounting information or others. Contents of the VSA Objective of a Review Engagement
3. The objective of a review of financial statements is to enable an auditor and the audit firm to state
whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditors attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with Vietnamese Accounting Standards (or relevant accounting standards) (moderate assurance). Engagements to review financial statements do not provide all audit evidence or reasonable assurance which an audit of financial statements does. General principles of a review engagement
4. The auditor should comply with professional ethical principles set out in VSA 200 Objective
and General Principles Governing an Audit of Financial Statements in reviewing financial statements.
5. The auditor and the audit firm should conduct a review in accordance with this VSA. 6. The auditor should plan and perform the review with an attitude of professional skepticism
recognizing that circumstances may exist which cause the financial statements to be materially misstated.
7. For the purpose of expressing moderate assurance in the review report, the auditor should
obtain sufficient appropriate evidence primarily through inquiry and analytical procedures to be able to draw conclusions. SCOPE OF A REVIEW
8. The term scope of a review refers to the review procedures deemed necessary in the circumstances to
achieve the objective of the review. The procedures required to conduct a review of financial statements should be determined by the auditor having regard to the requirements of this VSA, relevant professional bodies, legislation, regulation and, where appropriate, the terms of the review engagement. Moderate Assurance
9. A review engagement provides a moderate level of assurance that the information subject to review is
free of material misstatement, this is expressed in the form of moderate assurance. Terms of Engagement
10. The audit company and the entity whose financial statements are subject to review should agree on 115
the terms of the engagement.
11. An engagement letter will be of assistance in planning the review work. It is in the interests of both the
client entity and the audit firm that the engagement letter document the key terms of the appointment to avoid misunderstanding regarding such matters as the objectives and scope of the engagement, the extent of the auditor and audit firms responsibilities and the form of reports to be issued.
12. Matters that would be included in the engagement letter include:

The objective of the service being performed. Managements responsibility for the financial statements. The scope of the review, including reference to this Vietnamese Standard on Auditing. Unrestricted access to whatever records, documentation and other information requested in connection with the review. A sample of the report expected to be rendered. The fact that the engagement cannot be relied upon to disclose errors, illegal acts or other irregularities, for example, fraud or defalcations that may exist. A statement that an audit is not being performed and that an audit opinion will not be expressed. To emphasize this point and to avoid confusion, the auditor may also consider pointing out that a review engagement will not satisfy any statutory or third party requirements for an audit.
An example of an engagement letter for a review of financial statements appears in Appendix 01. Planning
13. The auditor should plan the work so that an effective engagement will be performed. 14. In planning a review of financial statements, the auditor should obtain or update the knowledge
of the business including consideration of the entitys organization, accounting systems, operating characteristics and the nature of its assets, liabilities, revenues and expenses.
15. The auditor needs to possess an understanding of such matters and other matters relevant to the
financial statements, for example, a knowledge of the entitys production and distribution methods, product lines, operating locations and related parties. The auditor requires this understanding to be able to make relevant inquiries and to design appropriate procedures, as well as to assess the responses and other information obtained. Work Performed by Others
16. When using work performed by another auditor or an expert, the auditor should be satisfied
that such work is adequate for the purposes of the review. Documentation
17. The auditor should document matters which are important in providing evidence to support the
review report, and evidence that the review was carried out in accordance with this VSA. Procedures and Evidence
18. The auditor should apply judgment in determining the specific nature, timing and extent of
review procedures. The auditor will be guided by such matters as: Any knowledge acquired by carrying out audits or reviews of the financial statements for prior periods. The auditors knowledge of the business including knowledge of the accounting principles and practices of the industry in which the entity operates. The entitys accounting systems. The extent to which a particular item is affected by management judgment. The materiality of transactions and account balances.
116
19. The auditor should apply the same materiality considerations as would be applied to financial
statement audits. Although there is a greater risk that misstatements will not be detected in a review than in an audit, the judgment as to what is material is made by reference to the information on which the auditor and the audit firm are reporting and the needs of those relying on that information, not to the level of assurance provided.
20. Procedures for the review of financial statements will ordinarily include:

Obtaining an understanding of the entitys business and the industry in which it operates. Inquiries concerning the entitys accounting principles and practices. Inquiries concerning the entitys procedures for recording, classifying and summarizing transactions, accumulating information for disclosure in the financial statements and preparing financial statements. Inquiries concerning all material assertions in the financial statements. Analytical procedures designed to identify relationships and individual items that appear unusual. Such procedures would include: - Comparison of the financial statements with statements for prior periods. - Comparison of the financial statements with anticipated results and financial position. - Study of the relationships of the elements of the financial statements that would be expected to conform to a predictable pattern based on the entitys experience or industry norm.
In applying these procedures, the auditor would consider the types of matters that required accounting adjustments in prior periods.

Inquiries concerning actions taken at meetings of shareholders, the board of directors, committees of the board of directors and other meetings that may affect the financial statements. Reading the financial statements to consider, on the basis of information coming to the auditors attention, whether the financial statements appear to conform with the basis of accounting indicated. Obtaining reports from other auditors, if any and if considered necessary, who have been engaged to audit or review the financial statements of components of the entity. Inquiries of persons having responsibility for financial and accounting matters concerning, for example: - Whether all transactions have been recorded. - Whether the financial statements have been prepared in accordance with specified accounting standards. - Changes in the entitys business activities and accounting principles and practices. - Matters as to which questions have arisen in the course of applying the foregoing procedures. - Obtaining written representations from management when considered appropriate.
Appendix 2 to this VSA provides an illustrative list of procedures which are often used. The list is not exhaustive, nor is it intended that all the procedures suggested apply to every review engagement.
21. The auditor should inquire about events subsequent to the date of the financial statements that
may require adjustment of or disclosure in the financial statements. The auditor does not have any responsibility to perform procedures to identify events occurring after the date of the review report.
22. If the auditor has reason to believe that the information subject to review may be materially
misstated, the auditor should carry out additional or more extensive procedures as are necessary to be able to express moderate assurance or to confirm that a modified report is required. Conclusions and Reporting
23. The review report should contain a clear written expression of moderate assurance. The auditor
should review and assess the conclusions drawn from the evidence obtained as the basis for the
117
expression of negative assurance.
24. Based on the work performed, the auditor should assess whether any information obtained
during the review indicates that the financial statements do not give a true and fair view (or are not presented fairly, in all material respects,) in accordance with the VAS.
25. The report on a review of financial statements describes the scope of the engagement to enable the
reader to understand the nature of the work performed and make it clear that an audit was not performed and, therefore, that an audit opinion is not expressed.
26. The report on a review of financial statements should contain the following basic elements,
ordinarily in the following layout: a) Name and address of the audit firm; b) Report number; c) Report title; d) Addressee; e) opening or introductory paragraph including: - identification of the financial statements on which the review has been performed; and - a statement of the responsibility of the entitys director (or leader) and the responsibility of the auditor and the audit firm; f) scope paragraph, describing the nature of a review, including: - a reference to this Vietnamese Standards on Auditing applicable to review engagements; - a statement that a review is limited primarily to inquiries and analytical procedures; and - a statement that an audit has not been performed, that the procedures undertaken provide less assurance than an audit and that an audit opinion is not expressed; g) statement of moderate assurance; h) issue place and date of the report; i) signature and seal. Appendices 03 and 04 to this VSA contain illustrations of review reports. 27. The review report should: a) Provide moderate assurance by stating that nothing has come to the auditors attention based on the review that causes the auditor to believe the financial statements do not give a true and fair view (or are not presented fairly, in all material respects,) in accordance with Vietnamese Accounting Standards (or accounting standards accepted in Vietnam); or b) if matters have come to the auditors attention, describe those matters that impair a true and fair view (or a fair presentation, in all material respects,) in accordance with Vietnamese Accounting Standards (or accounting standards accepted in Vietnam), unless impracticable, a quantification of the possible effect(s) on the financial statements, and either: - express a qualification of the moderate assurance provided; or - when the effect of the matter is so material and pervasive to the financial statements that the auditor concludes that a qualification is not adequate to disclose the misleading or incomplete nature of the financial statements, give an adverse statement that the financial statements do not give a true and fair view (or are not presented fairly, in all material respects,) in accordance with Vietnamese Accounting Standards (or accounting standards accepted in Vietnam); or c) if there has been a material scope limitation, describe the limitation and either: - express a qualification of the moderate assurance regarding the possible adjustments had the limitation not existed; or - when the possible effect of the limitation is so significant and pervasive that the auditor concludes that no level of assurance can be provided, express a modified opinion.
118
28. The auditor should date the review report as of the date the review is completed, which includes
performing procedures relating to events occurring up to the date of the report. However, the auditor should not date the review report earlier than the date on which the financial statements were approved by management. Appendix 01 Example of an Engagement Letter for a Review of Financial Statements An engagement letter for a review of financial statements should comply with VSA 210 Terms of Audit Engagements. In addition, this letter should indicate the auditors understanding of the terms and objectives of his engagement and the nature and limitations of the services he will provide in accordance with this VSA. For example: We will review the balance sheet of ABC Company as of December 31, 20X1, and the related statements of income and cash flows for the year then ended, in accordance with the Vietnamese Standards on Auditing applicable to reviews. We will not perform an audit of such financial statements and, accordingly, we will not express an audit opinion on them. Accordingly, we expect to report on the financial statements as follows: (see Appendix 3) Responsibility for the financial statements, including adequate disclosure, is that of the management of the Company. This includes the maintenance of adequate accounting records and internal controls and the selection and application of accounting policies. As part of our review process, we will request written representations from management concerning financial statement assertions and other material matters. This letter will be effective for future years unless it is terminated, amended or superseded as may be mutually agreed upon. Our engagement cannot be relied upon to disclose whether fraud or errors, or illegal acts, exist. However, we will inform you of any material matters that come to our attention.
Appendix 02 Illustrative Detailed Procedures that may be Performed in an Engagement to Review Financial Statements
1. The inquiry and analytical review procedures carried out in a review of financial statements are
determined by the auditors judgment. The procedures listed below are for illustrative purposes only. It is not intended that all the procedures suggested apply to every review engagement. This Appendix is not intended to serve as a program or checklist in the conduct of a review. General
2. Discuss terms and scope of the engagement with the client and the engagement team. 3. Prepare an engagement letter setting forth the terms and scope of the engagement. 4. Obtain an understanding of the entitys business activities, the accounting and internal control
systems and the system for preparing financial statements.
5. Inquire whether all financial information is recorded:

a) completely; b) promptly; and c) after the necessary authorization.
6. Obtain the trial balance and determine whether it agrees with the general ledger and the financial
statements.
7. Consider the results of previous audits and review engagements, including accounting adjustments
119
required.
8. Inquire whether there have been any significant changes in the entity from the previous year. 9. Inquire about the accounting policies and consider whether:
a) they comply with Vietnamese Accounting Standards or other accounting standards accepted in Vietnam; b) they have been applied appropriately; and c) they have been applied consistently and, if not, consider whether disclosure has been made of any changes in the accounting policies.
10. Read the minutes of meetings of the Board of Management, shareholders, directors and control
department in order to identify matters that could be important to the review.
11. Inquire if actions taken at shareholder, director or Board of Management meetings that affect the
financial statements have been appropriately reflected therein.
12. Inquire about the existence of transactions with related parties, how such transactions have been
accounted for and whether related parties have been properly disclosed.
13. 14. 15. 16.
Inquire about contingencies and commitments. Inquire about plans to dispose of major assets or business segments. Obtain the financial statements and discuss them with management. Consider the adequacy of disclosure in the financial statements and their suitability as to classification and presentation. financial statements for comparable prior periods and, if available, with budgets and forecasts.
17. Compare the results shown in the current period financial statements with those shown in 18. Obtain explanations from management for any unusual fluctuations or inconsistencies in the
financial statements from such comparison.
19. Consider the effect of any unadjusted errors - individually and in aggregate. Bring the errors to
the attention of management and determine how the unadjusted errors will influence the report on the review.
20. Consider obtaining a representation letter from management.

Cash 21. Obtain the bank reconciliations. Inquire of client personnel about any old or unusual reconciling items on the reconciliations. 22. Inquire about transfers between cash accounts for the period before and after the review date. 23. Inquire whether there are any restrictions on cash accounts. Receivables 24. Inquire about the accounting policies for initially recording trade receivables and determine whether any trade and sale allowances are given on such transactions. 25. Obtain a schedule of receivables and determine whether the total agrees with the trial balance. 26. Obtain and consider explanations of significant variations in account balances from previous periods or from those anticipated. 27. Obtain an aged analysis of the trade receivables. Inquire about the reason for unusually large accounts, credit balances on accounts or any other unusual balances and inquire about the collectibility of receivables. 28. Discuss with management the classification of receivables, including non-current balances, net credit balances and amounts due from shareholders, Board of Management and other related parties in the financial statements. 29. Inquire about the method for identifying slow payment accounts and setting allowances for
120
doubtful accounts and consider it for reasonableness. 30. Inquire whether receivables have been pledged, factored or discounted. 31. Inquire about procedures applied to ensure that a proper cutoff of sales transactions and sales returns has been achieved. 32. Inquire whether accounts represent goods shipped but not yet billed and, if so, whether adjustments have been made to properly reflect the goods in inventory. 33. Inquire whether any large receivables have been settled issued after the balance sheet date. Inventories
34. Obtain the list of counted inventory and determine whether:

a) any difference has resulted between the list and the balance in the trial balance; and b) the list is based on a physical count of inventory.
35. Inquire about the method for counting inventory. 36. Where a physical count was not carried out on the balance sheet date, inquire
a) if perpetual or periodic inventory system is used and whether comparisons are made with actual quantities on hand; and b) whether an integrated (work-in-progress and finished product) costing system is used and whether it has produced reliable information in the past.
37. Discuss adjustments made resulting from the last physical inventory count. 38. Inquire about procedures applied to control cutoff and any inventory movements. 39. Inquire about the basis used in valuing each category of the inventory and, in particular, regarding
the elimination of inter-branch profits. Inquire whether inventory is valued at the lower of cost and net realizable value.
40. Consider the consistency with which inventory valuation methods have been applied, including
factors such as material, labor and overhead.
41. Compare amounts of major inventory categories with those of prior periods and with those
anticipated for the current period. Inquire about major fluctuations and differences.
42. Compare inventory turnover with that in previous periods. 43. Inquire about the method used for identifying slow moving and obsolete inventory and whether
such inventory has been accounted for at net realizable value.
44. Inquire whether any of the inventory has been consigned to the entity and, if so, whether
adjustments have been made to exclude such goods from inventory.
45. Inquire whether any inventory is pledged, stored at other locations or on consignment to others
and consider whether such transactions have been accounted for appropriately. Investments (including associated companies and marketable securities)
46. Obtain a schedule of the investments at the balance sheet date and determine whether it agrees
with the trial balance.
47. 48. 49. 50.
Inquire about the valuation of investments as of the balance sheet date. Compare the carrying values of investments with their net realizable values. Consider whether there has been proper accounting for gains and losses and investment income. Inquire about the classification of long-term and short-term investments.
Property and depreciation
51. Obtain a schedule of the property indicating the cost and accumulated depreciation and determine
whether it agrees with the trial balance.
52. Inquire about the depreciation method in use and the estimated useful lives of property.
121
53. Discuss with management the additions and deletions to property accounts and accounting for
gains and losses on sales or retirements.
54. Inquire about the consistency with which the depreciation method and rates have been applied and
compare depreciation provisions with prior years.
55. Inquire whether there are any liens on the property. 56. Discuss whether lease agreements have been properly reflected in the financial statements in
conformity with current accounting standards and regulations. Prepaid expenses, intangibles and other assets
57. Obtain schedules identifying the nature of these accounts and discuss with management the
recoverability thereof.
58. Inquire about the basis for recording these accounts and the amortization methods used. 59. Compare balances of related expense accounts with those of prior periods and discuss significant
variations with management.
60. Discuss the classification between long-term and short-term accounts with management.
Loans payable
61. Obtain from management a schedule of loans payable and determine whether the total agrees with
the trial balance.
62. Inquire whether there are any loans where management has not complied with the provisions of
the loan agreement and, if so, inquire as to managements actions and whether appropriate adjustments have been made in the financial statements.
63. Consider the reasonableness of interest expense in relation to loan balances. 64. Inquire whether loans payable are secured. 65. Inquire whether loans payable have been classified between non-current and current.
Trade payables
66. Inquire about the accounting policies for initially recording trade payables and whether the entity
is entitled to any allowances given on such transactions.
67. Obtain and consider explanations of significant variations in account balances from previous
periods or from those anticipated.
68. Obtain a schedule of trade payables and determine whether the total agrees with the trial balance. 69. Inquire whether balances are reconciled with the creditors statements and compare with prior
period balances. Compare turnover with prior periods.
70. Consider whether there could be material unrecorded liabilities. 71. Inquire whether payables to shareholders, Board of Manage- ment and other related parties are
separately disclosed. Accrued and contingent liabilities
72. Obtain a schedule of the accrued liabilities and determine whether the total agrees with the trial
balance.
73. Compare major balances of related expense accounts with similar accounts for prior periods. 74. Inquire about approvals for such accruals, terms of payment, compliance with terms, collateral
and classification.
75. Inquire about the method for determining accrued liabilities. 76. Inquire as to the nature of amounts included in contingent liabilities and commitments.
122
77. Inquire whether any actual or contingent liabilities exist which have not been recorded in the
accounts. If so, discuss with management whether provisions need to be made in the accounts or whether disclosure should be made in the notes to the financial statements. Income and other taxes
78. Inquire about the accounting procedures and the disparity between accounting-purpose and taxpurpose incomes and disputes with taxation authorities, which could have a significant effect on the taxes payable by the entity.
79. Consider the tax expense in relation to the entitys income for the period. 80. Inquire from management as to the adequacy of the recorded deferred and current tax liabilities
including provisions in respect of prior periods. Subsequent events
81. Obtain from management the latest interim financial statements and compare them with the
financial statements being reviewed or with those for comparable periods from the preceding year.
82. Inquire about events after the balance sheet date that would have a material effect on the financial
statements under review and, in particular, inquire whether: a) any substantial commitments or uncertainties have arisen subsequent to the balance sheet date; b) any significant changes in the share capital, long-term debt or working capital have occurred up to the date of inquiry; and c) any unusual adjustments have been made during the period between the balance sheet date and the date of inquiry. d) Consider the need for adjustments or disclosure in the financial statements.
83. Obtain and read the minutes of meetings of shareholders, Board of Management and directors
subsequent to the balance sheet date. Litigation 84. Inquire from management whether the entity is the subject of any legal actions-threatened, pending or in process. Consider the effect thereof on the financial statements. Equity 85. Obtain and consider a schedule of the transactions in the equity accounts, including new issues, retirements and dividends. 86. Inquire whether there are any restrictions on retained earnings or other equity accounts. Operations 87. Compare results with those of prior periods and those expected for the current period. Discuss significant variations with management. 88. Discuss whether the recognition of major sales, other incomes and expenses have taken place in the appropriate periods. 89. Consider extraordinary and unusual items. 90. Consider and discuss with management the relationship between related items in the revenue account and assess the reasonableness thereof in the context of similar relationships for prior periods and other information available to the auditor.
123
Appendix 03 Form of Unqualified Review Report XYZ Audit Firm Address, tel. and fax no. ... No. ... AUDITORS REPORT ON RESULTS OF FINANCIAL STATEMENTS REVIEW To: The Board of Management and Directors of ABC Company We have reviewed the accompanying balance sheet of ABC Company at December 31, 20X1, and the related statements of income and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to issue a report on these financial statements based on our review. We conducted our review in accordance with the Vietnamese Standard on Auditing applicable to review engagements. This Standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial statements are free of material misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view (or are not presented fairly, in all material respects,) in accordance with Vietnamese Accounting Standards (or other accounting standards accepted in Vietnam) and relevant legislation. XYZ AUDIT FIRM Director (Full name, signature, seal) CPA Certificate No. ... , day, month, year Auditor (Full name, signature) CPA Certificate No. ...
124
Appendix 04 Examples of Review Reports other than Unqualified XYZ Audit Firm Address, tel. and fax no. No. ... Form 01 Example 01: Qualification for a Departure From Vietnamese Accounting Standards
AUDITOR S REPORT ON RESULTS OF FINANCIAL STATEMENTS REVIEW To: The Board of Management and Directors of ABC Company We have reviewed the accompanying balance sheet of ABC Company at December 31, 20X1, and the related statements of income and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to issue a report on these financial statements based on our review. We conducted our review in accordance with the Vietnamese Standards on Auditing applicable to review engagements. This Standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial statements are free of material misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit, and, accordingly, we do not express an audit opinion. Management has informed us that inventory has been stated at its cost which is in excess of its net realizable value. Managements computation, which we have reviewed, shows that inventory, if valued at the lower of cost and net realizable value as required by Vietnamese Accounting Standard Inventories, would have been decreased by XXX, and net assets and shareholders equity would have been decreased by YYY. Based on our review, except for the effects of the overstatement of inventory described in the previous paragraph, nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view (or are not presented fairly, in all material respects,) in accordance with Vietnamese Accounting Standards (or other accounting standards accepted in Vietnam) and relevant legislation. XYZ AUDIT FIRM Director (Full name, signature, seal) CPA Certificate No. ... , day, month, year Auditor (Full name, signature) CPA Certificate No. ...
125
XYZ Audit Firm Address, tel. and fax no. ... No.
Form 02 Example 02: Adverse Report for a Departure From Vietnamese Accounting Standards
AUDITORS REPORT ON RESULTS OF FINANCIAL STATEMENTS REVIEW To: The Board of Management and Directors of ABC Company We have reviewed the balance sheet of ABC Company at December 31, 20X1, and the related statements of income and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to issue a report on these financial statements based on our review. We conducted our review in accordance with the Vietnamese Standards on Auditing applicable to review engagements. This Standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial statements are free of material misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion. As noted in note X to the financial statements, these financial statements do not reflect the consolidation of the financial statements of subsidiary companies, the investment in which is accounted for on a cost basis. Under Vietnamese Accounting Standards, the financial statements of the subsidiaries are required to be consolidated. Based on our review, because of pervasive effect on the financial statements of the entity failing to comply with the accounting principles as discussed in the preceding paragraph, and to consolidate the financial statements of its subsidiaries, the accompanying financial statements do not give a true and fair view (or are not presented fairly, in all material respects,) in accordance with Vietnamese Accounting Standards (or other accounting standards accepted in Vietnam) and relevant legislation. XYZ AUDIT FIRM Director (Full name, signature, seal) CPA Certificate No. ... , day, month, year Auditor (Full name, signature) CPA Certificate No. ...
126
Standard No 920 Engagements to perform agreed-upon procedures regarding financial information
STANDARD 920 ENGAGEMENTS TO PERFORM AGREED-UPON PROCEDURES REGARDING FINANCIAL INFORMATION (Issued in pursuance of the Minister of Finance Decision No. 195/2003/QD-BTC dated 28 November 2003) GENERAL
1. The purpose of this Vietnamese Standard on Auditing (ISA) is to establish standards and provide
guidance on professional responsibilities of the auditor and audit firm when an engagement to perform agreed-upon procedures regarding financial information is undertaken and on the form and content of the report that the auditor issues in connection with such an engagement.
2. The auditor and the audit firm should conduct an agreed-upon procedures engagement in
accordance with this VSA and the terms of the engagement.
3. This VSA is directed toward engagements regarding financial information on agreed-upon procedures
and may provide useful guidance for engagements regarding non-financial information, provided the auditor has adequate knowledge of the subject matter in question and reasonable criteria exist on which to base findings. For engagements regarding financial information on agreed-upon procedures, apart from this VSA the auditor should refer to other VAS.
4. An engagement to perform agreed-upon procedures may involve the auditor in performing certain
procedures concerning individual items of financial data (for example, accounts payable, accounts receivable, purchases from related parties and sales and profits of a segment of an entity), a financial statement (for example, a balance sheet) or even a complete set of financial statements. Contents of the VSA Objective of an Agreed-upon Procedures Engagement
5. The objective of an agreed-upon procedures engagement is for the auditor to carry out
procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings.
6. As the auditor and the audit firm simply provide a report of the factual findings of agreed-upon procedures,
no assurance is expressed as to the reliability of financial information. Instead, users of the report assess for themselves the procedures and findings reported by the auditor and draw their own conclusions from the auditors work.
7. The report is restricted to those parties that have agreed to the procedures to be performed since
others, unaware of the reasons for the procedures, may misinterpret the results. General Principles of an Agreed-upon Procedures Engagement
8. The auditor should comply with the professional ethical principles in accordance with VSA 200
Objective and General Principles Governing an Audit of Financial Statements. Ethical principles governing the auditors professional responsibilities for this type of engagement are: a) independence b) integrity; c) objectivity; d) professional competence and due care; e) confidentiality; f) professional behavior; and g) technical standards.
127
In certain circumstances, independence is not a requirement for agreed-upon procedures engagements. Where the auditor is not independent, a statement to that effect would be made in the report of factual findings. Defining the Terms of the Engagement
9. The auditor and the audit firm should ensure with representatives of the entity and, ordinarily,
other specified parties who will receive copies of the report of factual findings, that there is a clear understanding regarding the agreed procedures and the conditions of the engagement. Matters to be agreed include the: - Nature of the engagement including the fact that the procedures performed will not constitute an audit or a review and that accordingly no assurance will be expressed. - Stated purpose for the engagement. - Identification of the financial information to which the agreed-upon procedures will be applied. - Nature, timing and extent of the specific procedures to be applied. - Anticipated form of the report of factual findings. - Limitations on distribution of the report of factual findings. When such limitation would be in conflict with the legal requirements, if any, the auditor would not accept the engagement. 10. In certain circumstances, for example, when the procedures have been agreed to between the regulator and representatives of the accounting profession, the auditor may not be able to discuss the procedures with all the parties who will receive the report. In such cases, the auditor may consider, for example, discussing the procedures to be applied with appropriate representatives of the parties involved or sending them a draft of the type of report that will be issued.
11. The auditor should send an engagement letter documenting the key terms of the appointment:
- A listing of the procedures to be performed as agreed upon between the parties. - A statement that the distribution of the report of factual findings would be restricted to the specified parties who have agreed to the procedures to be performed. An example of an engagement letter appears in Appendix 01 to this VSA. Planning 12. The auditor and the audit firm should plan the work so that an effective engagement will be performed. Documentation 13. The auditor should document matters which are important in providing evidence to support the report of factual findings, and evidence that the engagement was carried out in accordance with this VSA and the terms of the engagement. Procedures and Evidence 14. The auditor and the audit firm should carry out the procedures agreed upon and use the evidence obtained as the basis for the report of factual findings. 15. The procedures applied in an engagement to perform agreed-upon procedures may include one or some of the following methods in accordance with VSA 500 Audit evidence: - Inquiry. - Observation. - Inspection. - Obtaining confirmations. - Recomputation, comparison and other clerical accuracy checks. - Analysis Reporting 16. The report on an agreed-upon procedures engagement needs to describe the purpose and the agreed-
128
upon procedures of the engagement in sufficient detail to enable the reader to understand the nature and the extent of the work performed. 17. The report of factual findings should contain: a) Name of address of the audit firm; b) Report number; c) Report title; d) Report addressee; e) a statement that the procedures performed were those agreed upon with the recipient; f) identification of specific financial or non-financial information to which the agreed-upon procedures have been applied; g) a statement that the engagement was performed in accordance with this Vietnamese Standards on Auditing applicable to agreed-upon procedures engagements; h) when relevant a statement that the auditor is not independent of the entity; i) identification of the purpose for which the agreed-upon procedures were performed; j) a listing of the specific procedures performed; k) a description of the auditors factual findings including sufficient details of errors and exceptions found; l) statement that the procedures performed do not constitute either an audit or a review and, as such, no assurance is expressed; m) a statement that had the auditor performed additional procedures, an audit or a review, other matters might have come to light that would have been reported; n) a statement that the report is restricted to those parties that have agreed to the procedures to be performed; o) a statement (when applicable) that the report relates only to the elements, accounts, items or financial and non-financial information specified and that it does not extend to the entitys financial statements taken as a whole; p) issue place and date of the report; q) name, signature and seal. Appendix 02 to this ISA contains an example of a report of factual findings issued in connection with an engagement to perform agreed-upon procedures regarding financial information.
129
Appendix 1 Example of an Engagement Letter for an Agreed-upon Procedures Engagement The following letter is for use as a guide in conjunction with paragraph 09 of this VSA and is not intended to be a standard letter. The engagement letter will need to be varied according to individual requirements and circumstances. XYZ AUDIT FIRM Address, tel. and fax no. ... No. ENGAGEMENT LETTER To: The Board of Management and Directors of ABC Company This letter is to confirm our understanding of the terms and objectives of our engagement and the nature and limitations of the services that we will provide. Our engagement will be conducted in accordance with VSA 920 Engagements to perform agreed-upon procedures regarding financial information and we will indicate so in our report. We have agreed to perform the following procedures and report to you the factual findings resulting from our work: (describe the nature, timing and extent of the procedures to be performed, including specific reference, where applicable, to the identity of documents and records to be read, individuals to be contacted and parties from whom confirmations will be obtained). The procedures that we will perform are solely to assist you in (state purpose). Our report is not to be used for any other purpose and is solely for your information. The procedures that we will perform will not constitute an audit or a review made in accordance with Vietnamese Standards on Auditing and, consequently, no assurance will be expressed. We look forward to full cooperation with your staff and we trust that they will make available to us whatever records, documentation and other information requested in connection with our engagement. Our fees, which will be billed as work progresses, are based on the time required by the individuals assigned to the engagement plus out-of-pocket expenses. Individual hourly rates vary according to the degree of responsibility involved and the experience and skill required. Please sign and return the attached copy of this letter to indicate your understanding of the terms of the engagement including the specific procedures which we have agreed will be performed. ACKNOWLEDGED ON BEHALF OF ABC COMPANY BY DIRECTOR (FULL NAME, SIGNATURE AND SEAL) , date... month... year... XYZ AUDIT FIRM DIRECTOR OR REPRESENTATIVE (FULL NAME, SIGNATURE AND SEAL)
130
Appendix 2 Example of a Report of Factual Findings in Connection with Accounts Payable XYZ AUDIT FIRM Address, tel. and fax no. ... No. REPORT OF FACTUAL FINDINGS To: The Board of Management and Directors of ABC Company We have performed the procedures agreed with you and enumerated below with respect to the accounts payable of ABC Company as at (date), set forth in the accompanying schedules (not shown in this example). Our engagement was undertaken in accordance with VSA 920 Engagements to perform agreed-upon procedures regarding financial information. The procedures were performed as follows: 1. We obtained and checked the addition of the trial balance of accounts payable as at (date) prepared by ABC Company, and we compared the total to the balance in the related general ledger account. 2. We compared the attached list (not shown in this example) of major suppliers and the amounts owing at (date) to the related names and amounts in the trial balance. 3. We obtained suppliers statements or requested suppliers to confirm balances owing at (date). 4. We compared such statements or confirmations to the amounts referred to in 2. For amounts which did not agree, we obtained reconciliations from ABC Company. For reconciliations obtained, we identified and listed outstanding invoices, credit notes and outstanding checks, each of which was greater than xxx. We located and examined such invoices and credit notes subsequently received and checks subsequently paid and we ascertained that they should in fact have been listed as outstanding on the reconciliations. We report our findings below: a) With respect to item 1 we found an additional account payable which was not recorded and put it on the list of trade accounts payable. b) With respect to item 2 we found the amounts compared to be in agreement. c) With respect to item 3 we found there were suppliers statements for all such suppliers. d) With respect to item 4 we found the amounts agreed with supplier confirmations, or with respect to amounts which did not agree. We requested that ABC Company prepare reconciliations and found that the credit notes, invoices and outstanding checks over xxx were appropriately listed as reconciling items with the following exceptions: (Detail the exceptions). Because the above procedures do not constitute either an audit or a review made in accordance with Vietnamese Standards on Auditing, we do not express any assurance on the accounts payable as of (date). Had we performed additional procedures or had we performed an audit or review of the financial statements in accordance with Vietnamese Standards on Auditing, other matters might have come to our attention that would have been reported to you. Our report is solely for the purpose set forth in the first paragraph of this report and for your information and is not to be used for any other purpose or to be distributed to any other parties. This report relates only to the accounts and items specified above and does not extend to any financial statements of ABC Company, taken as a whole. XYZ Audit Firm Director (Full name, signature, seal) CPA Certificate No. ... ..., day... month ...year ... Auditor (Full name, signature) CPA Certificate No. ...
131
132
Standard No 402 Audit considerations relating to entities using service organizations
STANDARD 402 AUDIT CONSIDERATIONS RELATING TO ENTITIES USING SERVICE ORGANIZATIONS (Issued in pursuance of the Minister of Finance Decision No. 03/2005/QD-BTC dated 18 January 2005) GENERAL 1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide guidance to the audit firm and the auditor whose client uses a service organization. This VSA also describes the service organization auditors reports which may be obtained by the audit firm and auditor of the client entity. organization affects the clients accounting and internal control systems so as to plan the audit and develop an effective audit approach. 3. A client may use services of an organization or individual (hereinafter referred jointly to as service organization), such as record-keeping, financial information gathering and IT related services. If a client uses a service organization, certain policies, procedures and records maintained by the service organization may be relevant to the audit of the financial statements of the client entity. This VSA applies to audits of financial statements of entities using services organizations and also applies to an audit of other financial information and related services rendered by the audit firm. The auditor and the audit firm should comply with this VSA in conducting an audit and rendering related services. It is expected that the auditee (client) entity and users of the audit report should possess essential knowledge as to the objective and general principles set out in this VSA in working with the auditor and the audit firm and in dealing with relations maintained during the audit. In this VSA, the following terms have the meaning attributed below: 05. Service organization refers an organization licensed or individual registered to do business in accordance with the provisions of law and liable to provide such services to other businesses and organizations on the basis of contract terms and conditions. 06. Service organization auditor means the auditor who audits the financial statements of a service organization as a client. CONTENTS OF THE VSA Considerations of the Client Audit Firm and Auditor 7. A service organization may establish and execute policies and procedures that affect a client organizations accounting and internal control systems. These policies and procedures are physically and operationally separate from the client organization. When the services provided by the service organization are limited to recording and processing client transactions and the client retains authorization and maintenance of accountability, the client may be able to implement effective policies and procedures within its organization. When the service organization executes the clients transactions and maintains accountability, the client may deem it necessary to rely on policies and procedures at the service organization. to the client and the relevance to the audit. In doing so, the client auditor would need to consider the following, as appropriate:
2. The auditor and the audit firm should consider how the services rendered by a service
4.
8. The auditor and the audit firm should determine the significance of service organization activities
133

Nature of the services provided by the service organization. Terms of contract and relationship between the client and the service organization. The material financial statement assertions that are affected by the use of the service organization. Inherent risk associated with those assertions. Extent to which the clients accounting and internal control systems interact with the systems at the service organization. Clients internal controls that are applied to the transactions processed by the service organization. Service organizations capability and financial strength, including the possible effect of the failure of the service organization on the client. Information about the service organization such as that reflected in user and technical manuals. Information available on general controls and computer systems controls relevant to the clients applications.
Consideration of the above may lead the auditor and the audit firm to decide that the control risk assessment will not be affected by controls at the service organization; if so, further consideration of this VSA is unnecessary. 9. The client auditor would also consider the report of the service organization auditors, internal auditors, or regulatory agencies as a means of providing information about the accounting and internal control systems of the service organization and about its operation and effectiveness.
10. If the client audit firm and the auditor concludes that the activities of the service organization are significant to the entity and relevant to the audit, the audit firm and the auditor should obtain sufficient information to understand the accounting and internal control systems and to assess control risk at either the maximum, or a lower level if tests of control are performed. 11. If information is insufficient, the client auditor would consider the need to request the service organization to have its audit firm and auditor perform such procedures as to supply the necessary information, or the need to visit the service organization to obtain the information. A client auditor wishing to visit a service organization may advise the client to request the service organization to give the client auditor access to the necessary information.
12. The client auditor may be able to obtain an understanding of the accounting and internal control
systems affected by the service organization by reading the third-party report of the service organization auditor. In addition, when assessing control risk for assertions affected by the systems controls of the service organization, the client auditor may also use the service organization auditors report. If the client auditor uses the report of a service organization auditor, the auditor should consider making inquiries concerning that auditors professional competence in the context of the specific assignment undertaken by the service organization auditor. 13. The client auditor may conclude that it would be efficient to obtain audit evidence from tests of control to support an assessment of control risk at a lower level. Such evidence may be obtained by: a) Performing tests of the clients controls over activities of the service organization. b) Obtaining a service organization auditors report that expresses an opinion as to the operating effectiveness of the service organizations accounting and internal control systems for the processing applications relevant to the audit. c) Visiting the service organization and performing tests of control. Service Organization Auditors Reports
14. When using a service organization auditors report, the client audit firm and auditor should
consider the nature of and content of that report. 15. The report of the service organization auditor will ordinarily be one of two types as follows: Type A - Report on suitability of design
134
a) a description of the service organizations accounting and internal control systems, ordinarily prepared by the management of the service organization; and b) an opinion by the service organization audit firm and auditor that: i) ii) the above description is accurate; the systems controls have been placed in operation; and
iii) the accounting and internal control systems are suitably designed to achieve their stated objectives. Type B - Report on suitability of design and operating effectiveness a) a description of the service organizations accounting and internal control systems, ordinarily prepared by the management of the service organization; and b) an opinion by the service organization audit firm and auditor that: i) ii) the above description is accurate; the systems controls have been placed in operation;
iii) the accounting and internal control systems are suitably designed to achieve their stated objectives; and iv) the accounting and internal control systems are operating effectively based on the results from the tests of control. In addition to the opinion on operating effectiveness, the service organization audit firm and auditor would identify the tests of control performed and related results. The report of the service organization auditor will ordinarily contain restrictions as to use (generally to management, the service organization and its customers, and client audit firm and auditor). 16. The audit firm and the auditor should consider the scope of work performed by the service organization audit firm and auditor and should assess the usefulness and appropriateness of reports issued by the service organization audit firm and auditor. 17. While Type A reports may be useful to the audit firm and the auditor in gaining the required understanding of the accounting and internal control systems, an auditor would not use such reports as a basis for reducing the assessment of control risk. 18. In contrast, Type B reports may provide such a basis at a lower control risk assessment since tests of control have been performed. In this case, a client auditor would consider: a) whether the controls tested by the service organization audit firm and auditor are relevant to the clients transactions (significant assertions in the clients financial statements); and, whether the service organization auditors tests of control and the results are adequate. With respect to the latter, two key considerations are the length of the period covered by the service organization auditors tests and the time since the performance of those tests.
b)
19. For those specific tests of control and results that are relevant, a client audit firm and auditor
should consider whether the nature, timing and extent of such tests provide sufficient appropriate audit evidence about the effectiveness of the accounting and internal control systems to support the client auditors assessed level of control risk. 20. The auditor of a service organization may be engaged to perform control procedures as requested by the client auditor. Such engagements should be subject to agreement between the client entity, its audit firm, the service organization and its audit firm.
21. When the client audit firm and auditor use a report from the auditor of a service organization, no
reference should be made in the client auditors report to the auditors report on the service organization.
135
Standard No 620 Using the work of an expert
STANDARD 620 USING THE WORK OF AN EXPERT (Issued in pursuance of the Minister of Finance Decision No. 03/2005/QD-BTC dated 18 January 2005) GENERAL 1. 2. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide guidance on using the work of an expert as audit evidence for a financial statement audit. When using the work performed by an expert in a financial statement audit, the auditor and the audit firm should obtain sufficient appropriate audit evidence that such work is adequate for the purposes of the audit. This VSA applies to audits of financial statements and also applies to an audit of other financial information and related services rendered by the audit firm. The auditor and the audit firm should comply with this VSA in using the work of an expert during an audit of financial statements. It is expected that the audited entity and users of the audit report should possess essential knowledge of this VSA in working with the auditor and audit firm and in dealing with the relations in using the work of an expert during an audit of financial statements. In this VSA, the following terms have the meaning attributed below:
3.
4. Expert means a person or firm possessing special skill, knowledge and experience in a particular field
other than accounting and auditing. 5. An expert may be: a) engaged by the entity; b) engaged by the audit firm; or c) employed by the entity; d) employed by the audit firm, or e) an organization or individual other than employed by the entity and the audit firm.
contents of the vsa Determining the Need to Use the Work of an Expert 6. During the audit, the auditor and the audit firm may need to obtain audit evidence in the form of reports, opinions, valuations and statements of an expert. Examples are: Valuations of certain types of assets, for example, land and buildings, plant and machinery, works of art, and precious stones. Determination of the remaining useful life of machinery and equipment Determination of quantities or physical condition of assets, for example, minerals stored in stockpiles, underground mineral and petroleum reserves. Determination of amounts using specialized techniques or methods, for example, an actuarial valuation. The measurement of work completed and to be completed on contracts in progress. Legal opinions concerning interpretations of agreements, statutes and regulations. When determining the need to use the work of an expert, the auditor and the audit firm would consider: a) the materiality of the financial statement item being considered; b) the risk of misstatement based on the nature and complexity of the matter being considered; and c) the quantity and quality of other audit evidence available.
7.
136
Competence and Objectivity of the Expert
8. When planning to use the work of an expert, the auditor and the audit firm should assess the
professional competence of the expert. This will involve considering the experts: a) professional certification or licensing by, or membership in, an appropriate professional body; and b) experience and reputation in the field in which the auditor is seeking audit evidence. 9. The auditor and the audit firm should assess the objectivity of the expert. The risk that an experts objectivity will be impaired increases when the expert is: a) employed by the entity or the audit firm, or b) related to the entity in financial terms, such as having an investment, share capital or lending; or family relations, such as being a parent, spouse, child, sibling, etc of the management members, including the chief accountant).
10. If the auditor is concerned regarding the competence or objectivity of the expert, the auditor needs to discuss any reservations with management and consider whether sufficient appropriate audit evidence can be obtained concerning the work of an expert. The auditor and the audit firm may need to undertake additional audit procedures or seek audit evidence from another expert. Scope of the Experts Work
11. The auditor and the audit firm should obtain sufficient appropriate audit evidence that the
scope of the experts work is adequate for the purposes of the audit. Audit evidence may be obtained through a review of the terms of reference which are often set out in written instructions from the entity to the expert. Such instructions to the expert may cover matters such as: The objectives and scope of the experts work. A general outline as to the specific matters the auditor expects the experts report to cover. The intended use by the auditor and the audit firm of the experts work, including the possible communication to third parties of the experts identity and extent of involvement. The extent of the experts access to appropriate records and files. Clarification of the experts relationship with the entity, if any. Confidentiality of the entitys information. Information regarding the assumptions and methods intended to be used by the expert and their consistency with those used in prior periods. In the event that these matters are not clearly set out in written instructions to the expert, the auditor may need to communicate with the expert directly to obtain audit evidence in this regard. Assessing the Work of the Expert
12. The auditor and the audit firm should assess the appropriateness of the experts work as audit
evidence regarding the financial statement assertion being considered. This will involve assessment of whether the substance of the experts findings is properly reflected in the financial statements or supports the financial statement assertions, and consideration of: Source data used. Assumptions and methods used and their consistency with prior periods. Results of the experts work in the light of the auditors overall knowledge of the business and of the results of other audit procedures. 13. When considering whether the expert has used source data which is appropriate in the circumstances, the auditor and the audit firm would consider the following procedures: a) making inquiries regarding any procedures undertaken by the expert to establish whether the source data is sufficient, relevant and reliable; and b) reviewing or testing the data used by the expert.
137
14. The appropriateness and reasonableness of assumptions and methods used and their application are the responsibility of the expert. The auditor and the audit firm do not have the same expertise and, therefore, cannot always challenge the experts assumptions and methods. However, the auditor and the audit firm will need to obtain an understanding of the assumptions and methods used and to consider whether they are appropriate and reasonable, based on the auditors knowledge of the business and the results of other audit procedures.
15. If the results of the experts work do not provide sufficient appropriate audit evidence or if the
results are not consistent with other audit evidence, the auditor and the audit firm should resolve the matter. This may involve discussions with the entity and the expert, applying additional procedures, including possibly engaging another expert, or modifying the audit report. Reference to an Expert in the Auditors Report
16. When issuing an unmodified audit report, the auditor should not refer to the work of an
expert. Such a reference might be misunderstood to be a qualification of the auditors opinion or a division of responsibility, neither of which is intended. 17. If, as a result of the work of an expert, the auditor and the audit firm decide to issue a modified auditors report, in some circumstances it may be appropriate, in explaining the nature of the modification, to refer to or describe the work of the expert (including the identity of the expert and the extent of the experts involvement). In these circumstances, the auditor and the audit firm would obtain the permission of the expert before making such a reference. If permission is refused and the auditor and the audit firm believe a reference is necessary, the auditor may need to seek legal advice.
138
Standard No 710 - Comparatives
STANDARD 710 COMPARATIVES
GENERAL 1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide guidance on the responsibilities of the auditor and the audit firm regarding comparatives in an audit of financial statements. This VSA does not deal with situations when summarized financial statements are presented with the audited financial statements. 2. The auditor and the audit firm should determine whether the comparatives comply in all material respects with Vietnamese Accounting Standards relevant to the preparation and disclosure of the financial statements being audited. Comparatives in financial statements, for example, may present amounts (such as financial position, results of operations, cash flows) and appropriate disclosures in an explanatory form of an entity for more than one period, depending on the standard on financial statements presentation. The frameworks and methods of presentation are referred to in this VSA as follows:
3.
a) Corresponding Figures where amounts and other disclosures for the preceding period are
included as part of the current period financial statements, and are intended to be read in relation to the amounts and other disclosures relating to the current period (referred to as current period figures for the purpose of this VSA). These corresponding figures are not presented as complete financial statements capable of standing alone, but are an integral part of the current period financial statements intended to be read only in relationship to the current period figures; and
b) Comparative Financial Statements where amounts and other disclosures for the preceding period
are included for comparison with the financial statements of the current period, but do not form part of the current period financial statements. (Refer to Appendix 1 to this VSA for brief formats of comparative financial statements) 4. Comparatives are presented in compliance with the relevant financial reporting framework. The essential audit reporting differences are that: a) for corresponding figures, the auditors report only refers to the financial statements of the current period; whereas b) for comparative financial statements, the auditors report refers to each period that financial statements are presented. CONTENTS OF THE VSA Corresponding Figures The Auditor and Audit Firms Responsibilities
5. The auditor should obtain sufficient appropriate audit evidence that the corresponding figures
meet the requirements of the relevant financial reporting framework. The extent of audit procedures performed on the corresponding figures is significantly less than for the audit of the current period figures and is ordinarily limited to ensuring that the corresponding figures have been correctly reported and are appropriately classified. This involves the auditor and the audit firm assessing whether: a) accounting policies used for the corresponding figures are consistent with those of the current period (or whether appropriate adjustments and/or disclosures have been made); and b) corresponding figures agree with the amounts and other disclosures presented in the prior
139
period or whether appropriate adjustments and/or disclosures have been made. 6. When the financial statements of the prior period have been audited by another auditor, the incoming auditor assesses whether the corresponding figures meet the conditions specified in paragraph 05 above and also follows the guidance in VSA 510, Initial Engagements - Opening Balances. When the financial statements of the prior period were not audited, the incoming auditor and audit firm nonetheless assesses whether the corresponding figures meet the conditions specified in paragraph 05 above and also follows the guidance in VSA 510, Initial Engagements - Opening Balances. If the auditor becomes aware of a possible material misstatement in the corresponding figures when performing the current period audit, the auditor performs such additional procedures as are appropriate in the circumstances.
7.
8.
Reporting
9. When the comparatives are presented as corresponding figures, the auditor and the audit firm
should issue an audit report in which the comparatives are not specifically identified because the auditors opinion is on the current period financial statements as a whole, including the corresponding figures. 10. The auditor's report would make specific reference to the corresponding figures only in the circumstances described in paragraphs 11, 12, 14(b), and 15 through 18.
11. When the auditors report on the prior period, as previously issued, included a qualified
opinion, disclaimer of opinion, or adverse opinion and the matter which gave rise to the modification is:
a) unresolved, and results in a modification of the auditors report regarding the current
period figures, the auditors report should also be modified regarding the corresponding figures; or
b) unresolved, but does not result in a modification of the auditors report regarding the
current period figures, the auditors report should be modified regarding the corresponding figures.
12. When the auditors report on the prior period, as previously issued, included a qualified opinion,
disclaimer of opinion, or adverse opinion and the matter which gave rise to the modification is resolved and properly dealt with in the financial statements, the current report does not ordinarily refer to the previous modification. However, if the matter is material to the current period, the auditor may include an emphasis of matter paragraph dealing with the situation.
13. In performing the audit of the current period financial statements, the auditor, in certain unusual
circumstances, may become aware of a material misstatement that affects the prior period financial statements on which an unmodified report has been previously issued.
14. In such circumstances, the auditor should consider the guidance in VSA 560, Subsequent
Events, and
a) if the prior period financial statements have been revised and reissued with a new
auditors report, the auditor should be satisfied that the corresponding figures agree with the revised financial statements; or
b) if the prior period financial statements have not been revised and reissued, and the
corresponding figures have not been properly restated and/or appropriate disclosures have not been made, the auditor should issue a modified report on the current period financial statements modified with respect to the corresponding figures included therein.
15. If, in the circumstances described in paragraph 13, the prior period financial statements have
not been revised and an auditors report has not been reissued, but the corresponding figures have been properly restated and appropriate disclosures have been made in the current period
140
financial statements, the auditor may include an emphasis of matter paragraph describing the circumstances and referencing to the appropriate disclosures. In this regard, the auditor also considers the guidance in VSA 560, Subsequent Events. Incoming Auditor - Additional Requirements Prior Period Financial Statements Audited by Another Auditor
16. The incoming auditor is permitted to refer to the predecessor auditors report on the corresponding
figures in the incoming auditors report for the current period. When the auditor decides to refer to another auditor, the incoming auditors report should indicate:
a) that the financial statements of the prior period were audited by another auditor; b) the type of report issued by the predecessor auditor and, if the report was modified, the
reasons therefor; and
c) the date of that report.

Prior Period Financial Statements Not Audited
17. When the prior period financial statements are not audited, the incoming auditor should state
in the auditors report that the corresponding figures are unaudited. Such a statement does not, however, relieve the auditor of the requirement to perform appropriate procedures regarding opening balances of the current period. Clear disclosure in the financial statements that the corresponding figures are unaudited is encouraged.
18. In situations where the incoming auditor identifies that the corresponding figures are
materially misstated, the auditor should request management to revise the corresponding figures or, if management refuses to do so, appropriately modify the report. Comparative Financial Statements The Auditor and Audit Firm's Responsibilities
19. The auditor should obtain sufficient appropriate audit evidence that the comparative financial
statements meet the requirements of the relevant financial reporting framework. This involves the auditor assessing whether: a) accounting policies of the prior period are consistent with those of the current period or whether appropriate adjustments and/or disclosures have been made; and b) prior period figures presented agree with the amounts and other disclosures presented in the prior period or whether appropriate adjustments and disclosures have been made. 20. When the financial statements of the prior period have been audited by another auditor and audit firm, the incoming auditor assesses whether the comparative financial statements meet the conditions in paragraph 19 above and also follows the guidance in VSA 510, Initial Engagements - Opening Balances. 21. When the financial statements of the prior period were not audited, the incoming auditor nonetheless assesses whether the comparative financial statements meet the conditions specified in paragraph 19 above and also follows the guidance in VSA 510, Initial Engagements - Opening Balances. 22. If the auditor becomes aware of a possible material misstatement in the prior year figures when performing the current period audit, the auditor performs such additional procedures as are appropriate in the circumstances. Reporting
23. When the comparatives are presented as comparative financial statements, the auditor should
issue a report in which the comparatives are specifically identified because the auditors opinion is expressed individually on the financial statements of each period presented. Since the auditors report on comparative financial statements applies to the individual financial statements
141
presented, the auditor and the audit firm may express a qualified or adverse opinion, disclaim an opinion, or include an emphasis of matter paragraph with respect to one or more financial statements for one or more periods, while issuing a different report on the other financial statements.
24. When reporting on the prior period financial statements in connection with the current years
audit, if the opinion on such prior period financial statements is different from the opinion previously expressed, the auditor and the audit firm should disclose the substantive reasons for the different opinion in an emphasis of matter paragraph. This may arise when the auditor becomes aware of circumstances or events that materially affect the financial statements of a prior period during the course of the audit of the current period. Incoming Auditor - Additional Requirements Prior Period Financial Statements Audited by Another Auditor
25. When the financial statements of the prior period were audited by another auditor, a) the predecessor auditor may reissue the audit report on the prior period with the
incoming auditor only reporting on the current period; or
b) the incoming auditors report should state that the prior period was audited by another
auditor and the incoming auditors report should indicate: (i) that the financial statements of the prior period were audited by another auditor; (ii) the type of report issued by the predecessor auditor and if the report was modified, the reasons therefor; and (iii) the date of that report.
26. In performing the audit on the current period financial statements, the incoming auditor, in certain
unusual circumstances, may become aware of a material misstatement that affects the prior period financial statements on which the predecessor auditor had previously reported without modification.
27. In these circumstances, the incoming auditor should discuss the matter with management and,
after having obtained managements authorization, contact the predecessor auditor and propose that the prior period financial statements be restated. If the predecessor agrees to reissue the audit report on the restated financial statements of the prior period, the auditor should follow the guidance in paragraph 25.
28. If, in the circumstances discussed in paragraph 26, the predecessor does not agree with the proposed
restatement or refuses to reissue the audit report on the prior period financial statements, the introductory paragraph of the auditors report may indicate that the predecessor auditor reported on the financial statements of the prior period before restatement. In addition, if the incoming auditor is engaged to audit and applies sufficient procedures to be satisfied as to the appropriateness of the restatement adjustment, the auditor may also include the following paragraph in the report: "We also audited the adjustments described in Note X that were applied to restate the 20X0 financial statements. In our opinion, such adjustments are appropriate and have been properly applied." Prior Period Financial Statements Not Audited
29. When the prior period financial statements are not audited, the incoming auditor should state
in the auditors report that the comparative financial statements are unaudited. Such a statement does not, however, relieve the auditor of the requirement to carry out appropriate procedures regarding opening balances of the current period. Clear disclosure in the financial statements that the comparative financial statements are unaudited is encouraged.
30. In situations where the incoming auditor identifies that the prior year unaudited figures are
materially misstated, the auditor should request management to revise the prior years figures or if management refuses to do so, appropriately modify the report.
142
Appendix 01 Discussion of Financial Reporting Frameworks for Comparatives 1. Comparatives covering one or more preceding periods provide the users of financial statements with information necessary to identify trends and changes affecting an entity over a period of time. 2. Under financial reporting frameworks, comparability and consistency are desirable qualities for financial information. Comparability is the quality of having certain characteristics in common and comparison is normally a quantitative assessment of the common characteristics. Consistency is a quality of the relationship between two accounting numbers. Consistency (for example, consistency in the use of accounting principles from one period to another, the consistency of the length of the reporting period, etc.) is a prerequisite for true comparability. 3. There are two broad financial reporting frameworks for comparatives: the corresponding figures and the comparative financial statements. 4. Under the corresponding figures framework, the corresponding figures for the prior period(s) are an integral part of the current period financial statements and have to be read in conjunction with the amounts and other disclosures relating to the current period. The level of detail presented in the corresponding amounts and disclosures is dictated primarily by its relevance to the current period figures. 5. Under the comparative financial statements framework, the comparative financial statements for the prior period(s) are considered separate financial statements. Accordingly, the level of information included in those comparative financial statements (including all statement amounts, disclosures, footnotes and other explanatory statements to the extent that they continue to be of significance) approximates that of the financial statements of the current period.
Appendix 02 EXAMPLE AUDITORS REPORTS (Comparatives) Example 01: Report for the circumstances described in paragraph 11a XYZ COMPANY Address, tel. and fax, email No.:....................................... AUDITORS REPORT ON THE FINANCIAL STATEMENTS OF ABC COMPANY FOR THE YEAR To: The Board of Management and Directors of ABC Company We (*) have audited the accompanying balance sheet of ABC Company as of December 31, 20X1, and the related statements of income and cash flows for the year then ended together with the appended notes. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit. Basis of Opinion We conducted our audit in accordance with Vietnamese Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the current (or accepted) accounting standards and regulations; accounting principles and methods used and significant
143
estimates and judgments made by the management as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in Note X to the financial statements, no depreciation has been provided in the financial statements which practice, in our opinion, is not in accordance with Vietnamese Accounting Standards. This is the result of a decision taken by management at the start of the preceding financial year and caused us to qualify our audit opinion on the financial statements relating to that year. Based on the straight-line method of depreciation and annual rates of 5% for the building and 20% for the equipment, the loss for the year should be increased by VNDXXX in 20X1 and VNDXXY in 20X0, the fixed assets should be reduced by accumulated depreciation of VNDXXX in 20X1 and VNDXXY in 20X0, and the accumulated loss should be increased by VNDXXX in 20X1 and VNDXXY in 20X0. Qualified Opinion In our opinion, except for the effect on the financial statements of the matter referred to in the preceding paragraph, the financial statements give a true and fair view, in all material respects, of the financial position of the Company as of December 31, 20X1, and of the results of its operations and its cash flows for the year then ended in accordance with the current Vietnamese Accounting Standards and Regulations and other relevant legislation. XYZ COMPANY Director (Full name, signature, seal) CPA Certificate No. ... , day... month... year ...
Auditor (Full name, signature) CPA Certificate No. ...
(*) It may be relevant to specify the name of XYZ Audit Firm.
144
Example 02: Report for the circumstances described in paragraph 11b XYZ COMPANY Address, tel. and fax, email No.:....................................... AUDITORS REPORT ON THE FINANCIAL STATEMENTS OF ABC COMPANY FOR THE YEAR To: The Board of Management and Directors of ABC Company We (*) have audited the accompanying balance sheet of ABC Company as of December 31, 20X1, and the related statements of income and cash flows for the year then ended together with the appended notes. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit. Basis of Opinion We conducted our audit in accordance with Vietnamese Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the current (or accepted) accounting standards and regulations; accounting principles and methods used and significant estimates and judgments made by the management as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion. Because we were appointed auditors of the Company during 20X1, we were not able to observe the counting of the physical inventories at the beginning of that (period) or satisfy ourselves concerning those inventory quantities by alternative means. Since opening inventories enter into the determination of the results of operations, we were unable to determine whether a revision of the auditor's report on the financial statements might be necessary for the year ended 20X0. Qualified Opinion In our opinion, except for the effect on the corresponding figures for 20X0 of the adjustments, if any, which we might have determined to be necessary had we been able to observe beginning inventory quantities as at ..., the financial statements give a true and fair view, in all material respects, of the financial position of the Company as of December 31, 20X1, and of the results of its operations and its cash flows for the year then ended in accordance with the current Vietnamese accounting standards and regulations and other relevant legislation. XYZ COMPANY Director Auditor (Full name, signature, seal) (Full name, signature) CPA Certificate No. ... CPA Certificate No. ... , day ... month ... year ... (*) It may be relevant to specify the name of XYZ Audit Firm.
145
Example 03: Report for the circumstances described in paragraph 23 XYZ COMPANY Address, tel. and fax, email No.:....................................... AUDITORS REPORT ON THE FINANCIAL STATEMENTS OF ABC COMPANY FOR THE YEAR To: The Board of Management and Directors of ABC Company We (*) have audited the accompanying balance sheet of ABC Company as of December 31, 20X1, and the related statements of income and cash flows for the year then ended together with the appended notes. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. Basis of Opinion We conducted our audit in accordance with Vietnamese Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the current (or accepted) accounting standards and regulations; accounting principles and methods used and significant estimates and judgments made by the management as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in Note X to the financial statements, no depreciation has been provided in the financial statements which practice, in our opinion, is not in accordance with Vietnamese Accounting Standards. Based on the straight-line method of depreciation and annual rates of 5% for the building and 20% for the equipment, the loss for the year should be increased by XXX in 20X1 and XXX in 20X0, the fixed assets should be reduced by accumulated depreciation of XXX in 20X1 and XXX in 20X0, and the accumulated loss should be increased by XXX in 20X1 and XXX in 20X0. Qualified Opinion In our opinion, except for the effect on the financial statements of the matter referred to in the preceding paragraph, the financial statements give a true and fair view, in all material respects, of the financial position of the Company as of December 31, 20X1 and 20X0, and of the results of its operations and its cash flows for the years then ended in accordance with the current Vietnamese accounting standards and regulations and other relevant legislations. XYZ COMPANY Director Auditor (Full name, signature, seal) (Full name, signature) CPA Certificate No. ... CPA Certificate No. ... , day... month... year ... (*) It may be relevant to specify the name of XYZ Audit Firm.
146
Example 04: Example Report for the circumstances described in paragraph 16 XYZ COMPANY Address, tel. and fax, email No.:....................................... AUDITORS REPORT ON THE FINANCIAL STATEMENTS OF ABC COMPANY FOR THE YEAR To: Board of Management and Directors of ABC Company We (*) have audited the accompanying balance sheet of ABC Company as of December 31, 20X1, and the related statements of income and cash flows for the year then ended together with the appended notes These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the Company as of December 31, 20X0, were audited by another auditor whose report dated March 31, 20X1 expressed an unqualified opinion on these financial statements. Basis of Opinion We conducted our audit in accordance with Vietnamese Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the current (or accepted) accounting standards and regulations; accounting principles and methods used and significant estimates and judgments made by the management as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion. Unqualified Opinion In our opinion, the financial statements give a true and fair view, in all material respects, of the financial position of the Company as of December 31, 20X1, and of the results of its operations and its cash flows for the year then ended in accordance with the current Vietnamese accounting standards and regulations and other relevant legislation. XYZ COMPANY Director (Full name, signature, seal) CPA Certificate No. ... , day ... month ... year ...
Auditor (Full name, signature) CPA Certificate No. ...
(*) It may be relevant to specify the name of XYZ Audit Firm.
147
Example 05: Report for the circumstances described in paragraph 25b XYZ COMPANY Address, tel. and fax, email No.:....................................... AUDITORS REPORT ON THE FINANCIAL STATEMENTS OF ABC COMPANY FOR THE YEAR To: The Board of Management and Directors of ABC Company We (*) have audited the accompanying balance sheet of ABC Company as of December 31, 20X1, and the related statements of income and cash flows for the year then ended together with the appended notes. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the Company as of December 31, 20X0, were audited by another auditor whose report dated March 31, 20X1 expressed a qualified opinion due to their disagreement as to the adequacy of the provision for doubtful receivables. Basis of Opinion We conducted our audit in accordance with Vietnamese Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the current (or accepted) accounting standards and regulations; accounting principles and methods used and significant estimates and judgments made by the management as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion. The receivables referred to above are still outstanding at December 31, 20X1 and no provision for potential loss has been made in the financial statements. Accordingly, the provision for doubtful receivables at December 31, 20X1 and 20X0 should be increased by XXX, the net profit for 20X0 decreased by XXX and the retained earnings at December 31, 20X1 and 20X0 reduced by XXX. Qualified Opinion In our opinion, except for the effect on the financial statements of the matter referred to in the preceding paragraph, the 20X1 financial statements referred to above give a true and fair view, in all material respects, of the financial position of the Company as of December 31, 20X1, and of the results of its operations and its cash flows for the year then ended in accordance with the current accounting standards and regulations and other relevant legislations. XYZ COMPANY Director Auditor (Full name, signature, seal) (Full name, signature) CPA Certificate No. ... CPA Certificate No. ... , day... month... year ... (*) It may be relevant to specify the name of XYZ Audit Firm.
148
Standard No 720 Other information in documents containing audited financial statements
STANDARD 720 OTHER INFORMATION IN DOCUMENTS CONTAININGAUDITED STATEMENTS (Issued in pursuance of the Minister of Finance Decision No. 03/2005/QD-BTC dated 18 January 2005) GENERAL 1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide guidance on the auditor and the audit firms consideration of other information, on which the auditor and the audit firm have no obligation to report, in documents containing audited financial statements. This VSA applies when an annual report is involved, however it may also apply to other documents, such as those used in securities offerings. 2. 3. The auditor should read the other information disclosed together with the audited financial statements to identify material inconsistencies with the audited financial statements. This VSA applies to audits of financial statements and also applies to an audit of other financial information and related services rendered by the audit firm. The auditor and the audit firm should comply with this VSA in the gathering and dealing with audit evidence. It is expected that the auditee (client) entity, and organizations and individuals involved in an audit of financial statements should possess essential knowledge as to the general principles and procedures set out in this VSA in working with the auditor and the audit firm during an audit of financial statements. In this VSA, the following terms have the meaning attributed below: FINANCIAL
4. Other information means financial and non-financial information required by statutes or practices which
can be disclosed with the financial statements of the entity. Examples of such information include a report by management or the board of directors on operations, important human resources summaries or data, planned capital expenditures, financial ratios, names of officers and directors and selected quarterly data.
5. 6.
Annual report means a set of documents including audited financial statements for a given year and the auditor's report. A material inconsistency exists when other information contradicts information contained in the audited financial statements. A material inconsistency may raise doubt about the audit conclusions drawn from audit evidence previously obtained and, possibly, about the basis for the auditors opinion on the financial statements. The auditor has a statutory or contractual obligation to report specifically on other information contained in the audited financial statements. However, the auditor and the audit firm need to give consideration to such other information when issuing a report on the financial statements, as the credibility of the audited financial statements may be undermined by inconsistencies which may exist between the audited financial statements and other information. The auditor and the audit firm are required to apply specific procedures to certain of the other information, for example, required supplementary data and interim financial information. If such other information is omitted or contains deficiencies, the auditor may be required to refer to the matter in the auditors report. When there is an obligation to report specifically on other information, the responsibilities of the auditor and the audit firm are determined by the nature of the engagement and by local legislation and professional standards. When such responsibilities involve the review of other information, the auditor
CONTENTS OF THE VSA
7.
8.
9.
149
will need to follow the guidance on review engagements in the appropriate auditing standards. Access to Other Information
10. In order that the auditor and the audit firm can consider other information included in the annual
report, timely access to such information will be required. The auditor therefore needs to make appropriate arrangements with the entity to obtain such information prior to the date of the auditors report. In certain circumstances, all the other information may not be available prior to such date. In these circumstances, the auditor and the audit firm would follow the guidance in paragraphs 21 to 24. Consideration of Other Information
11. The objective and scope of an audit of financial statements are formulated on the premise that the
auditors responsibility is restricted to information identified in the auditors report. Accordingly, the auditor and the audit firm have no specific responsibility to determine that other information is properly stated. Material Inconsistencies
12. If, on reading the other information, the auditor identifies a material inconsistency, the auditor
and the audit firm should determine whether the audited financial statements or the other information needs to be amended.
13. If an amendment is necessary in the audited financial statements and the entity refuses to
make the amendment, the auditor and the audit firm should express a qualified or adverse opinion.
14. If an amendment is necessary in the other information and the entity refuses to make the
amendment, the auditor and the audit firm should consider including in the auditors report an emphasis of matter paragraph describing the material inconsistency or taking other actions. The actions taken, such as not issuing the auditors report or withdrawing from the engagement, will depend upon the particular circumstances and the nature and significance of the inconsistency. The auditor would also consider obtaining legal advice as to further action. Material Misstatements of Fact 15. While reading the other information for the purpose of identifying material inconsistencies, the auditor may become aware of an apparent material misstatement of fact. material misstatement of fact, the auditor should discuss the matter with the entitys management. When discussing the matter with the entitys management, the auditor may not be able to evaluate the validity of the other information and managements responses to the auditors inquiries. The auditor and the audit firm would then need to consider whether valid differences of judgment or opinion exist.
16. If the auditor and the audit firm become aware that the other information appears to include a
17. When the auditor still considers that there is an apparent misstatement of fact, the auditor
should request management to consult with a qualified third party, such as the entitys legal counsel and should consider the advice received.
18. If the auditor concludes that there is a material misstatement of fact in the other information
which management refuses to correct, the auditor should consider taking further appropriate action. The actions taken could include such steps as notifying those persons ultimately responsible for the overall direction of the entity in writing of the auditors concern regarding the other information and obtaining legal advice. Availability of Other Information After the Date of the Auditors Report 20. When all the other information is not available to the auditor prior to the date of the auditors report, the auditor would read the other information at the earliest possible opportunity thereafter to identify material inconsistencies. 21. If the auditor identifies a material inconsistency or becomes aware of an apparent material
150
misstatement of fact, the auditor would determine whether the audited financial statements or the other information need revision. 22. 23. When revision of the audited financial statements is appropriate, the guidance in VSA 560, Subsequent Events, would be followed. When revision of the other information is necessary and the entity agrees to make the revision, the auditor and the audit firm would carry out the procedures necessary under the circumstances. The procedures may include reviewing the steps taken by management to ensure that individuals in receipt of the previously issued financial statements, the auditors report thereon and the other information are informed of the revision. revision, the auditor should consider taking further appropriate action. The actions taken could include such steps as notifying management of the entity in writing of the auditors concern regarding the other information and obtaining legal advice.
24. When revision of the other information is necessary but management refuses to make the
151
Standard No 930 Engagement to compile financial information
STANDARD 930 ENGAGEMENT TO COMPILE FINANCIAL INFORMATION GENERAL
1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide
guidance on the professional responsibilities of public practice accountants and accounting service firms (hereinafter jointly referred to as the accountant) when an engagement to compile financial information is undertaken and the form and content of the report the accountant issues in connection with such a compilation. This standard also constitutes a basis for the audit firm and the auditor to implement engagements to compile financial information or audit financial statements of entities using service organizations.
2. The accountant (also the auditor and the audit firm) should comply with this VSA in implementing
engagements to compile financial information.
3. This VSA is directed toward the compilation of financial information and also applies to
engagements to compile non-financial information, provided the accountant has adequate knowledge of the subject matter in question. Engagements to provide limited assistance to a client in the preparation of financial statements (for example, on the selection of an appropriate accounting policy) do not constitute an engagement to compile financial information. In this VSA, the following terms have the meaning attributed below:
4. Engagements to compile financial information means engagements including the preparation of part
or the whole set of financial statements, combined financial statements or the collection, classification and summarization of other financial information. CONTENTS OF THE VAS Objective of a Compilation Engagement
5. The objective of a compilation engagement is for the accountant to use accounting expertise, as
opposed to auditing expertise, to collect, classify and summarize financial information. This ordinarily entails reducing detailed data to a manageable and understandable form without a requirement to test the assertions underlying that information. The procedures employed are not designed and do not enable the accountant to express any assurance on the financial information. General Principles of a Compilation Engagement
6. The accountant should comply with the code of ethics for professional accountants in
conducting engagements to compile financial information as follows: a) independence; b) integrity; c) objectivity; d) professional competence and due care; e) confidentiality; f) professional behavior; and g) technical standards. Where the accountant is not independent, a statement to that effect would be made in the accountants report.
7. The accountant engaged in compiling financial information should issue a report on the
completed compilation engagement (Appendix 02). Defining the Terms of the Engagement
152
8. The accountant should ensure that there is a clear understanding between the client and the
accountant regarding the terms of the engagement. Matters to be considered include the: Nature of the engagement including the fact that neither an audit nor a review will be carried out and that accordingly no assurance will be expressed. Fact that the engagement cannot be relied upon to disclose errors or fraud. Nature of the information to be supplied by the client. Fact that management is responsible for the accuracy and completeness of the information supplied to the accountant for the completeness and accuracy of the compiled financial information. Basis of accounting on which the financial information is to be compiled and the fact that it, and any known departures therefrom, will be disclosed. Intended use and distribution of the information, once compiled. Form of report to be rendered and responsibilities of the accountant whose name is associated therewith. 9. An engagement to compile financial information is in accordance with VSA 210, Terms of Audit Engagements, with major requirement stated at Appendix 01.
Planning
10. The accountant should plan the work so that an effective engagement will be performed. The
planning procedures are in accordance with VSA 300, Audit Planning. Documentation
11. The accountant should document matters which are important in providing evidence that the
engagement was carried out in accordance with this VSA and the terms of the engagement. Documentation procedures are in accordance with VSA 230, Documentation. Procedures 12. The accountant should obtain a general knowledge of the business and operations of the entity and should be familiar with the accounting principles and practices of the industry in which the entity operates and with the form and content of the financial information that is appropriate in the circumstances. 13. To compile financial information, the accountant requires a general understanding of the nature of the entitys business transactions, the form of its accounting records and the accounting basis on which the financial information is to be presented. The accountant ordinarily obtains knowledge of these matters through experience with the entity or inquiry of the entitys personnel. 14. Other than as noted in this VSA, the accountant is not ordinarily required to: a) make any inquiries of management to assess the reliability and completeness of the information provided; b) assess internal controls; c) verify any matters; or d) verify any explanations.
15. If the accountant becomes aware that information supplied by management is incorrect,
incomplete, or otherwise unsatisfactory, the accountant should consider performing the procedures set out in paragraph 14 and request management to provide additional information. If management refuses to provide additional information, the accountant should withdraw from the engagement, informing the entity of the reasons for the withdrawal.
16. The accountant should read the compiled information and consider whether it appears to be
appropriate in form and free from obvious material misstatements. In this sense, misstatements include: a) Mistakes in the application of the identified financial reporting framework.
153
b) Nondisclosure of the financial reporting framework and any known departures therefrom. c) Nondisclosure of any other significant matters of which the accountant has become aware. The accounting standards applied and other information on such application should be disclosed in the footnotes to the financial information, though their effects need not be quantified.
17. If the accountant becomes aware of material misstatements, the accountant should try to agree
appropriate amendments with the entity. If such amendments are not made and the financial information is considered to be misleading, the accountant should withdraw from the engagement. Responsibility of Management
18. The accountant should obtain an acknowledgment from management of its responsibility for
the appropriate presentation of the financial information and of its approval of the financial information. Such acknowledgment may be provided by representations from management which cover the accuracy and completeness of the underlying accounting data and the complete disclosure of all material and relevant information to the accountant. Reporting on a Compilation Engagement
19. Reports on compilation engagements should contain the following: a) Accounting service firm's name and address; b) report number; c) report title; d) addressee; e) a statement that the engagement was performed in accordance with VSA 930,
Engagements to Compile Financial Information;
f) when relevant, a statement that the accountant is not independent of the entity; g) identification of the financial information noting that it is based on information provided
by management;
h) a statement that management is responsible for the financial information compiled by the
accountant;
i) a statement that neither an audit nor a review has been carried out and that accordingly
no assurance is expressed on the financial information;
j) a paragraph, when considered necessary, drawing attention to the disclosure of material

departures from the identified financial reporting framework;
k) date of the report; l) signature, full name, professional license no. of the accountant; and signature, full name,
professional license no. of Director (or entity representative) and seal of the accounting service firm. Appendix 2 to this VSA contains examples of compilation reports.
20. The financial information compiled by the accountant should contain a reference such as
Unaudited, Compiled without Audit or Review or Refer to Compilation Report on each page of the financial information or on the front of the complete set of financial statements.
154
Appendix 01 Examples of Contract for Compilation Engagement (For guidance and reference) ACCOUNTING SERVICE FIRM Address, tel and fax... No.:...... SOCIALIST REPUBLIC OF VIETNAM Independence - Freedom - Happiness ------------------------------------------------, day month year
CONTRACT FOR COMPILATION ENGAGEMENT Pursuant to Economic Contract Ordinance and Decree No dated of the Government specifying the detailed implementation of the Economic Contract Ordinance; Pursuant to Accounting Law dated June 17, 2003 and Decree No. 129/2004/ND-CP dated May 31, 2004 of the Government specifying details and providing guidance on the implementation of Accounting Law for business activities; and, Pursuant to VSA 930, Engagements to Compile Financial Information, This memorandum of contract is made by and between Party A: Company (hereinafter referred to as Party A) Represented by Position Tel. Fax Address Account No. Represented by Position Tel. Fax Address Account No. : : : : : : . At Bank of : : : : : : . At Bank of
Party B: Accounting service firm (hereinafter referred to as Party B)
Upon agreement, the parties hereto hereby sign this contract with the terms and conditions specified as follows: Article 1: Description of Services Party B shall provide Party A with the compilation service as follows: .. Article 2: Governing Laws and Standards The compilation service shall be conducted in accordance with VSA 930, Engagements to Compile Financial Information, and related Vietnamese Accounting Standards.
155
Article 3: Responsibilities of the Parties 3.1. Party A shall: - supply Party B information for the preparation of financial statements and have responsibity for the accuracy and completeness of the information supplied and data combined by Party B in respect of a third party. Such information shall be formed in accordance with the current accounting standards and regulations; - open appropriate accounting books, maintain internal control procedures, and select and apply suitable accounting policies; - delegate responsibility personnel to work with and supply Party B accounting data and other information to enable Party B to prepare financial statements. 3.2. Party B shall: - prepare the balance sheet as at December 31, 200X, the related statements of income and cash flows for the year then ended and the appended notes. These financial statements are compiled in accordance with the accounting standards and regulations and VSA 930, Engagements to Compile Financial Information. - not perform audit procedures or limited examination of these financial statements, and hence shall not provide assurance on the financial statements. - inform Party A of the finding of errors, frauds or breaches of provisions of law, - state in the financial statements prepared by Party B, or disclose in the compilation report all departures from, and breaches of, the accounting standards and regulations. - Article 4: Reporting Upon completion of the engagement to compile financial information, Party B shall deliver to Party A: a compilation report; and the financial statements prepared by Party B. (In
Article 5: Fee and Payment Method - The total fee is:.................................................................................................. words:.........................................................................................................................)
- Payment of the fee shall be made (as agreed).

Article 6: Commitments and Due Dates Both parties commit to implement all articles as set forth herein. During the implementation, either party should be kept promptly informed of any problems that might obstruct the successful completion of the engagement to discuss possible solutions. Information shall be directed to the other party in writing at the above address. The engagement shall be completed within days beginning the date of this contract. Article 7: Effectiveness, Language and Duration of Contract This contract is made in copies in Vietnamese and copies in (English), of which the Vietnamese version shall be binding in case of misinterpretation and shall come into full force upon the second signature and seal. Either party shall retain copies in Vietnamese and copies in (English). This contract shall remain in effect until certification of completion or cancellation of contract as may be agreed by both parties.
156
PARTY B ACCOUNTING SERVICE FIRM Director (Signature, full name and seal) Accountant Practice Certificate No. (or CPA Certificate No. ) Appendix 02 Examples of Compilation Reports
PARTY A COMPANY Director (Signature, full name and seal)
Example 01: A report on an Engagement to Compile Financial Statements XYZ ACCOUNTING SERVICE FIRM Address, tel and fax, email No.:...................................... COMPILATION REPORT To: The Boards of Management and Directors of (Company name) On the basis of information you provide, we (*) have compiled the balance sheet as at December 31, 200X, the related statements of income and cash flow and the notes to the financial statements (set out on pages from to) for the year then ended. The financial statements are compiled in accordance with VSA 930, Engagements to Compile Financial Information. Management is responsible for the preparation and disclosure of these financial statements. Our responsibility is to assist the management in fulfilling its responsibilities. We have not audited or reviewed these financial statements and accordingly expressed no assurance thereon. XYZ ACCOUNTING SERVICE FIRM Director (Signature, full name and seal) Accountant Practice Certificate No. (or CPA Certificate No. ) ..., day... month... year ... Accountant (Signature, full name and seal) Accountant Practice Certificate No. (or CPA Certificate No. )
(*): It may be relevant to specify the name of XYZ Accounting Service Firm
157
Example 02: A report on an Engagement to Compile Financial Statements with an Additional Paragraph that Draws Attention to a Departure from the Identified Financial Reporting Framework XYZ ACCOUNTING SERVICES COMPANY Address, tel. and fax, email No.:....................................... COMPILATION REPORT To: The Boards of Management and Director of (Company name) On the basis of information you provide, we (*) have compiled the balance sheet as at December 31, 200X, the related statements of income and cash flow and the notes to the financial statements (set out on pages from to) for the year then ended. The financial statements are compiled in accordance with VSA 930, Engagements to Compile Financial Information. Management is responsible for the preparation and disclosure of these financial statements. Our responsibility is to assist the management in fulfilling its responsibilities. We have not audited or reviewed these financial statements and accordingly expressed no assurance thereon. We draw attention to Note X to the financial statements because management has elected not to capitalize the leases on fixed assets, which is a departure from the current accounting standards and regulations underlying the preparation of the financial statements. XYZ ACCOUNTING SERVICE Co. Director (Signature, full name and seal) Accountant Practice certificate No. (or cPA certificate No.) ..., day ... month ... year ... Accountant (Signature, full name and seal) Accountant Practice Certificate No. (or cPA certificate No.)
(*): it may be relevant to specify the name of xyz accounting service company
158
Standard No 1000 Audit of final accounts of investment
STANDARD 1000 AUDIT OF FINAL ACCOUNTS OF INVESTMENT (Issued in pursuance of the Minister of Finance Decision No. 03/2005/QD-BTC dated 18 January 2005) GENERAL 1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and fundamental principles and provide guidance on procedures to be followed by the audit firm and the auditor in an audit of final accounts of investment. The auditor and the audit firm should adhere to the objectives and principles of auditing final accounts of investment, conduct the audit in the established processes and orders and provide an opinion on the integrity and reasonability of the final accounts of investment in accordance with prevailing statutory regulations, auditing standards and fundamental principles and procedures prescribed in this VSA. This VAS applies to audits of final accounts of investment, which are reports on the investment costs of civil works and capital construction, development planning and other civil projects which have been completed. - The auditor and audit firm should comply with the provisions of this VSA in auditing final accounts of investment. - It is expected that the auditee (client) entity and users of the auditor's report should possess essential knowledge of the fundamental objectives and principles set out in this VSA in joining the auditor and the audit firm in the audit and dealing with the relations involving the audited information. Final accounts of investment refers to the system of financial reports prepared in accordance with prevailing accounting standards and systems, financial regulations and relevant provisions of law for fair reflection of economic, financial information and other essential data of the investment process of construction works and projects. Employer entity means the equity owner or the person charged with direct management and use of investment funds in accordance with the provisions of law. Authorized approver of final accounts means the legal representative of a state or governmental agency or a business enterprise who is authorized to verify and approve final accounts of investment according to prevailing regulations on construction management. Final accounts dossiers means all documents, papers and schedules necessarily prepared and gathered by Employer entity in relation to a completed civil work or project in accordance with prevailing regulations on investment costs settlement. Settled investment costs refers to the total valid outlays incurred during the construction process to bring the work into intended use. Valid outlays are costs realized following approved design estimates, technical norms, unit prices, financial-accounting regulations, construction contracts and relevant statutory requirements. Settled investment costs are normally less than, or equal to, the total budget originally approved or subsequently revised for a particular civil work or project. Technicians means individuals with qualified professional competency and skills on construction economy and technology, who are invited to undertake, or join the audit team in, the technical verification of a completed civil work or project.
2.
3.
In this VSA, the following terms have the meaning attributed below:
4.
5. 6.
7.
8.
9.
CONTENTS OF THE VSA
159
Objectives of an Audit of Final Accounts of Investment
10. The objective of an audit of final accounts of investment is to enable the auditor and audit firm to
express an opinion as to whether the final accounts of investment have been prepared in accordance with established accounting standards and systems and current regulations on investment costs settlement; comply with the provisions of law and relevant regulations on construction management; and present fairly, in all material respects, the conditions and results of construction investments.
11. The opinion expressed by the auditor and audit firm would enhance the credibility of the final
accounts of investment and create a basis for the authorized approver of final accounts to verify and approve the construction investment costs. Fundamental Principles Underlying an Audit of Final Accounts of Investment
12. The principles underlying governing an audit of final accounts of investment are:
Compliance with provisions of law; Compliance with the code of ethics for practicing auditors; and Application of existing auditing standards and adherence to the provisions of this VSA.
13. The auditor should show constant respects for and abide by the provisions of law in auditing final
accounts of investment.
14. The auditor should comply with the Code of ethics for practicing auditors, which contains the
a) b) c) d) e) f) g) underlying principles that follow: Independence; Integrity; Objectivity; Professional competence and due care; Confidentiality; Professional behaviour; and Technical standards.
15. In auditing final accounts of investment, the auditor should apply the related Vietnamese standards
on auditing, namely, Audit Engagements, Documentation, Planning, Knowledge of the Business, Audit Evidence, Audit Sampling and Other Selected Testing Procedures, Using the Work of an Experts, The Auditor's Reports on Financial Statements and other relevant standards. Responsibility for Final Accounts of Investment and Final Accounts Dossiers
16. The Director (or the leader) of the auditee entity (either Employer entity or Project
management) is responsible to prepare and present final accounts of investment in accordance with accounting standards and systems, current regulations on investment costs settlement and relevant provisions of law.
17. The Director (or the leader) of the auditee entity is responsible to make available to and provide the
auditor with final accounts dossiers prepared in accordance with relevant regulations and other related documents, including minutes (if any) of previous examinations and investigations and take liability for the fairness, accurateness and timeliness of the dossiers and documents supplied to the auditor. In the case of an entity failing to fully prepare the final accounts dossiers, an auditor can be engaged to provide advisory services of compliling final accounts dossiers as a separate contract unless otherwise the work is constructed with funds from the State budget. The auditor and audit firm which assist an entity in compiling such final accounts dossiers are not permitted to provide the entity with an audit of final accounts of investment.
160
18. The duty of the auditor and audit firm is to audit final accounts of investment and final
accounts dossiers and express an opinion on the audited final accounts of investment.
19. The audit of final accounts of investment will not release the Director (or the leader) of the auditee
entity from their responsibility for the final accounts of investment. Contract signing
20. It is required that a written contract be signed for a final accounts of investment audit between the
audit firm and Employer entity before the performance of the audit. For a project subject to audit, an audit contract may be reached before the date of its completion. The audit contract should be clear with a description of works and duties of the involved parties, the forms of auditor's reports, the service fees and payment modes. In signing and implementing an audit contract, the auditor and audit firm should adhere to VSA 210, Audit Engagements. (Refer to Appendix 01 for example of audit contract) Procedures and Approaches of a Final Accounts of Investment Audit
21. In auditing final accounts of investment, the auditor and audit firm ordinarily follow the threephase process that follows:
1) Planning phase 2) Testing phase 3) Conclusion phase

Phase 1. Planning
22. An audit plan should be prepared for an audit of final accounts of investment of projects of A
and B Groups according to prevailing regulations and should be communicated to the auditee entity for co-ordination. Planning should be adequately prepared, taking into accounts all material aspects of an audit; detection of risks, errors and inherent considerations to ensure the audit is completed as scheduled. The audit plan enables the auditor to assign work to assistants and technicians and coordinate with related personnel of the auditee entity. For an audit of the final accounts of investment of a project of Group C, the audit firm should prepare an audit plan as suggested in paragraphs 21 - 29 herein to keep the audit work in line with the project's size and nature.
23. The scope of an audit plan will vary depending on the size, complexity of the audit and the auditor's
knowledge and experience of the project under audit.
24. In planning an audit, the auditor should obtain an understanding of the project for an ascertain as to
transactions, events and matters material to the final accounts of investment and measure their ability to perform the audit as originally planned.
25. The plan for an audit of final accounts of investment has two components:

Overall audit plan; Audit program. The preparation of such an audit plan should be in accordance with VSA 300, Planning. Below is some major guidance: Overall audit plan
26. The overall audit plan describes the scope and conduct of an audit. The overall audit plan will
need to be sufficiently detailed to guide the development of the audit program. The form and content of an audit plan will vary depending on the size of the project and the complexity of the audit.
27. Matters to be considered by the auditor in developing the overall audit plan include:
161
Knowledge of the Project and the Entity under Audit The auditor's general understanding of construction management and changes in the construction management policies in the project implementing phase which cause significant impacts on the project. The auditor's understanding of the project's major features, which include such information as project characteristics; inception and completion dates; total investment budgets and resources; number of construction works and contractors involved; bid selection methods; major revisions and supplementations required during the investment process; and the manner in which the project is managed, etc. The condition of final accounts dossiers, e.g. whether they are already completed or being prepared, if so, identify the rate of completion. Managerial competency of Employer entity (project management). Understanding the Accounting and Internal Control Systems The accounting policies adopted by the entity and changes in those policies. The effect of new accounting pronouncements. The auditors cumulative knowledge of the accounting and internal control systems and the relative emphasis expected to be placed on tests of control and substantive procedures. To understand a project's condition and its accounting and internal control systems, the auditor would apply VSA 310, Knowledge of the Business. Risk and Materiality
The expected assessments of inherent and control risks and the identification of significant audit areas. The setting of materiality levels for audit purposes. The possibility of material misstatement, including the experience of past periods. Methods adopted for each segment of the audit work.
To assess risks and determine materiality levels, the auditor and the audit firm would apply VSA 400, Risk Assessments and Internal Control; and VSA 320, Audit Materiality. Coordination, Direction, Supervision and Review

The involvement of technicians and specialists of other fields. Staffing requirements. Timing schedule. The co-ordination and involvement of clients in the audit. Conditions requiring special attention, such as the existence of related parties. The terms of the engagement and any statutory responsibilities. The nature and timing of reports or other communication with the entity that are expected under the engagement. (Refer to Appendix 02 for example of overall audit plan)
Other Matters

Audit planning
28. An audit program sets out the nature, timing and extent of planned audit procedures required
to implement the overall audit plan.
162
29. In preparing the audit program, the auditor would consider the specific assessments of inherent and
control risks and the required level of assurance to be provided by substantive procedures. The auditor would also consider:

The timing of tests of controls and substantive procedures; and The coordination or any assistance expected from the client, the availability of assistance and the involvement of other auditors and technicians.
An audit firm's audit program, prepared by the auditor and the audit firm, may differ from those of other audit firms and be applied differently to each audit. The program should meet the audit objectives, be carried out in accordance with the audit plan and attain the desired effectiveness for the audit. (Refer to Appendix 03 for example of audit program) Changes to the overall audit plan and audit program
30. The overall audit plan and the audit program should be revised as necessary during the course of the
audit. Planning is continuous throughout the engagement because of changes in conditions or unexpected results of audit procedures. The reasons for significant changes would be recorded. Phase 2. Testing Supply of final accounts dossiers
31. Before the start of an audit, the auditor would require the auditee entity to supply the whole set of
final accounts dossiers. Upon receipt of the final accounts dossiers, the auditor and the entity should prepare a documents transfer-receipt minute for documentation. A set of final accounts dossiers is, as statutorily prescribed, composed of such documents and working papers as Request for approval of final accounts; Final accounts of investment; Legal documents on construction works, projects under audit; Construction contracts, contract liquidations with organizations, individuals involved in the project implementation; Minutes on test-transfer by phases and hand-over of work for the project as a whole; A-B finalized accounts, hand-over minutes of completed works for a project packages; and Such other related documents as designs, estimates, addenda, bid dossiers, as-built documents, logbooks...
32. As with sizeable projects (A, B Groups), before investigating documents, dossiers, final data and
records, the auditor may use such procedures as observation, measurement, photographing or enquiry of user entities... As a consequence of these site activities, the auditor would take minutes or make reports as audit evidence for working papers in the documentation. Work Contents of an Audit of Final Accounts of Investment
33. In the testing phase, the auditor would carry out the audit work according to the requirements,
guidelines and instructions by the Ministry of Finance on the process of verifying final accounts of investment. The examination will focus on: Legal Documents of Construction Project under Audit
Review and check the list of written decisions and resolutions on project investment and legal documents realized during the construction process to relevant statutory regulations. Review the validity of project related documents with regards to the making, approval, authorization and type of the documents. Examine the legality and observance of bid regulations and service contracts entered into with consultants, constructors, suppliers and installers.
163
Upon examination of a project's legal documents, the auditor would comment on its compliance with the provisions of law on construction investment.

Investment Funds Review and check the structure and the amount of funds realized or settled through the years by sources to the approved budget. Verify the appropriate use of funds against the funds structure authorized in investment decisions. Examine whether the movement of the project's investment funds is in line with established regulation and authorization. Upon investigating a construction project's sources of fund, the auditor would render an opinion on the allocation, settlement, lending and use of these funding sources. Investment Costs Verify whether finalized construction and installation costs are in agreement with the approved estimates, testing minutes, as-built drawings, variation reports; assess the compliance with statutory regulations on the application of price indexes, costs norms, inflation rates, surcharges (for appointed contractors), the application of tender prices (for tender contractors) and the observance of rules on constructors selection (appointed or tender); and examine whether the types of used materials are those named in respective construction designs, estimates, and bid documents. Verify whether equipment costs are in agreement with the quantities and amounts specified in supply contracts, purchase invoices, payment vouchers, and actual deliveries; determine whether such incidental costs as transportation, custody, insurance, maintenance, etc are relevant to service contracts, invoices, vouchers and in accordance with related regulations; and whether established regulations on suppliers selection (appointed or tender) are complied with. Verify whether other costs are in agreement with the approved estimates, and in accordance with statutorily set indexes, norms and standards; and whether established regulations on suppliers selection (appointed or tender) are complied with. Investment Items Disqualified as Part of Constructed Assets Identify the portion of investment costs which is disqualified as part of the constructed assets as declined by Employer entity under current statutory regulations in terms of substances, causes, and basis for the disqualification of these costs and the authorization of their exclusion from the constructed assets. Review the costs of damage caused on account of unforeseeable circumstances which are subject to exclusion from the costs of constructed assets in terms of substances and amounts as measured and quantified by insurance companies for write-off against the investment costs (where the assets are underwritten). Investigate the amount of damage given up as resolved by competent authorities for exclusion from the cost of constructed assets in terms of substances and amounts against the relevant resolution; and the authorization by competent agencies for exclusion of the amount from the constructed assets. Costs of Constructed Assets Check the listings and costs of constructed assets, including fixed and current items which are handed over to user or custodian entities, to hand-over minutes. Review the allocation of other costs to respective assets. Verify investment costs from which fixed assets and current assets are constituted. Investigate the conversion of the constructed assets costs in reference to the price ruling on the hand-over date as advised by the Ministry of Transport in the case of a project requiring an investment funds conversion. Receivables, Payables and Materials Left Over
164
Verify payments made to respective contractors by items of work and cost to date, thereby to determine a listing of accounts due to and from respective contractors. Test balances of cash and bank and receipts to be handed over to the State budget. Quantify and value left over materials and equipment. Quantify and value items in use for management purposes. Evidence
34. In conducting an audit, the auditor and the audit firm should obtain sufficient appropriate audit
evidence to be able to draw reasonable conclusions on which to base the audit opinion on final accounts of investment. The gathering and processing of evidence by the auditor and the audit firm should be in accordance with VSA500, Evidence; VSA530, Audit Sampling and Other Alternative Procedures; and VSA250, Consideration of Laws and Regulations in an Audit of Financial Statements. (Refer to paragraphs 35, 36 and 37 for major guidance)
35. Audit evidence means all written data, documentation, information and recorded images and voices
which are obtained by the auditor from various sources, both internal and external, by means of control tests and substantive procedures. The procedures applied by the auditor to collect audit evidence include investigation, observation, inquiry, confirmation, re-computation and analytical procedures. Where disagreement exists between evidences collected from various sources, the auditor should take into account applying further alternative audit procedures to settle such disagreement and arrive at final conclusions. If failing to gather sufficient appropriate audit evidence about an assertion, the auditor and audit firm would express a modified opinion
36. In gathering audit evidence, the auditor uses professional judgments to measure audit risk and design
audit procedures to reduce audit risk to an acceptable level. When designing audit procedures, the auditor should determine appropriate means of selecting items from the population for testing. The means available to the auditor are:
1) Selecting all items (100% examination): This will be applied when the project is risky with indications of
disputes, litigations or breaches of established regulations or has substandard works or when the client requires.
2) Selecting specific items: This will be applied to projects which are less risky, follow established
procedures and policies or have a number of similar work items, etc. The auditor would only select items of significant values or with doubtful risk or apply random selection.
3) Statistical and non-statistical audit sampling: This will be applied to items with less probable error or
with similar or repetitious nature. This method proves to be cost-effective but susceptible to audit risk.
37. The auditee entity is assumed to strictly comply with laws and regulations on construction investment.
The auditor should work with professional due-care in detecting acts of non-compliance with laws and regulations which would cause misstatements material to the final accounts of investment. The auditor should discuss any noncompliance with laws and regulations with the auditee entity and relevant competent authorities; should gather adequate appropriate evidence to support the degree of effect, material or immaterial, on the final accounts of investment. Upon detection of a material effect on the final accounts of investment which has not been revised or adjusted following the auditor's suggestion, the auditor and the audit firm would express a qualified opinion or an adverse opinion.
38. During the conduct of an audit, the auditor and audit firm use technicians other than employed by the
audit firm, such as specialists in favor of the work part relevant to their professional competence. In this case the auditor and audit firm should adhere to VSA620, Using the Work of an Expert and VSA220, Quality Control for Audit Work. (Refer to paragraphs 39 and 40 for major guidance):
39. The quality of an audit depends on the qualification of auditors involves, the assignment of work and
the outcome of such assignment:
165
a) The auditor, assistants and technicians should comply with the ethical standards, adhere to the principles of independence, integrity and objectivity; possess appropriate professional competence, prudence and confidentiality, have good professional behavior and comply with auditing standards. b) The auditor should be tasked with works relevant to their professional competence, provided with adequate guidance and supervised on each step of work within a given audit process. c) During the course of audit, any work beyond the auditor's capacity should be referred to specialists for advice. The auditor would refuse to accept a client request should it be against the provision of law or ethical standards.
40. As with a project or work which have been investigated or inspected by state agencies or involved
with litigation or dispute, the auditor should have particular attention to the conclusion of such investigations or inspections or the settlement of the litigation/dispute and take into account the requests and petitions by Employer entity (Project management) for appropriate evidence for an audit opinion. Obtaining representations from the auditor of the auditee entity
41. The auditor and audit firm should obtain evidence that the Director (or the leader) of the auditee
entity acknowledges their responsibility for the fair presentation of the final accounts of investment in accordance with prevailing accounting standards and systems and responsibility for the adequate provision of final accounts dossiers in accordance with the provisions of law and management representations on the final accounts of investment. The auditor can obtain such evidence from relevant minutes of meetings with client entities or by obtaining a written representation from management or a signed copy of the management report. In this case, the auditor and audit firm should adhere to VSA 580, Management Representations. (Refer to paragraphs 42, 43, 44 and 45 for major guidance)
42. Written representations requested from management may be limited to matters that are considered
either individually or collectively material to the financial statements. Regarding certain items it may be necessary for the auditor and audit firm to inform management of the auditors understanding of materiality.
43. The auditor should keep in the documentation representations by the Director or a representative of
the auditee entity in the form of summary of oral discussions or written representations for audit evidence.
44. If management refuses to provide a representation that the auditor considers necessary, this
constitutes a scope limitation and the auditor should express a qualified opinion or a disclaimer of opinion. In such circumstances, the auditor would evaluate any reliance placed on other representations made by management during the course of the audit and consider the degree of its effects on the final accounts of investment. Phase 3. Conclusion 45. In concluding an audit, the auditor should implement the procedures that follow:

Overall analyses and review of the audit results. Preparation of the auditor's report. Handling of works subsequent to issuance of the auditor's report. Overall analyses and review of the audit results
46. Analytical procedures should be applied during the process of planning an audit, examining the final
accounts of investment, gathering evidence and particularly of overally analyzing, reviewing the audit results before the formation of an audit opinion. The application of analytical procedures throughout an audit should adhere to VSA520, Analytical Procedures. (Refer to paragraphs 47, 48, and 49 for major guidance).
166
47. Overall review and analysis of the audit results will assist the auditor in asserting the conclusions
achieved as a result of the examination of the final accounts of investment to express an opinion on the integrity and reasonableness of the final accounts of investment. The overall review and analytical procedures are also aimed to issues which require further investigations.
48. When overall reviews and analytical procedures identify significant fluctuations or inconsistent
relationships, the auditor should further investigate and obtain adequate audit evidence about the audit conclusions.
49. The auditor and audit firm should review and assess conclusions reached as a consequence of
collected evidence and use these conclusions to base their opinion on the final accounts of investment. In expressing an opinion, the auditor and audit firm will measure the relevance of the final accounts of investment to the prevailing accounting standards and systems, the integrity and reasonableness of the final accounts of investment as well as the entity's compliance with the investment procedures and processes under the provisions of laws in implementing the project. Reporting 50. The auditor's report on the final accounts of investment includes the basic elements of a financial statement auditor's report prepared in accordance with VSA700, The Auditor's report on Financial Statements, in the following layout: Name and address of the audit firm Reference number of report Title of report Addressee of report Opening paragraph identifying:

a) b) c) d) e)
The objects of an audit of final accounts of investment; and The responsibility of the Director (or leader) of the auditee entity and that of the auditor and the audit firm. The auditing standards based on which to conduct the audit; and Works and procedures performed by the auditor in the audit;
f) Scope and basis paragraph stating:

g) Opinion of the auditor and audit firm on the final accounts of investment audited h) Place and date of the auditor's report i) 51.

The auditor's signature, auditor practice certificate number and audit firm's seal
Further, the auditor's report on the final accounts of investment covers the following particular contents: Legal basis and final accounts dossiers Audit results reached in relation to the reported amounts of the final accounts of investment, as opposed to the corresponding audited figures The auditor's recommendations to Employer entity and those parties concerned with the final accounts of investment
52. The audit basis and final accounts dossiers will constitute documents collected by and furnished to
the auditor to perform the audit using appropriate audit approaches and draw conclusions for an opinion on the final accounts of investment. The audit results and the auditor's opinion are dependent on the legal basis and final accounts dossiers so collected and furnished and therefore the auditor should identify the legal basis and the final accounts dossiers in the Scope and Basis paragraph in the auditor's report.
167
The legal basis and final accounts dossiers include:

Prevailing statutory regulations on management of construction investment; Relevant legal documents of the project; and Final accounts dossiers prepared in accordance with the provisions of law.
53. The results of an audit of final accounts of investment will provide a basis for the authorized
approver of final accounts to verify the investment funds. The auditor will identify the investment accounts as a result of their audit work in respect of the following:

Compliance with the investment procedures and processes in the course of a construction project; Investment funds; Construction investment costs; Items excluded from the costs of constructed assets; Costs of the assets handed over to user entities; and Outstanding receivables and payables and left over materials, equipment.
54. The auditor should identify the figures produced by the entity prior to the audit commencement (final
accounts), figures adjusted subsequent to the auditor's suggestions (audit results) provided in the auditor's report to premise their expression of opinions and provision of recommendations.
55. Where differences exist between the final accounts of investment and the audit results, the auditor
should then draw up an attachment, which breaks down the differences and provides an account therefor.
56. Where an amount advised by the auditor for adjustment is declined by the entity or accepted by the
entity without subsequent adjustment being made to the final accounts of investment, the auditor should also draw such an attachment or should rather disclose the fact in the auditor's report.
57. In expressing an opinion in the auditor's report on the final accounts of investment, the auditor and
audit firm should adhere to VSA 700, The Auditor's report on Financial Statements. (Refer to paragraphs 58 through 66 for major guidance).
58. Depending on the examination processes and results, the auditor and the audit firm can give

one of the following types of opinions on the final accounts of investment: Unqualified opinion Qualified opinion Disclaimer of opinion Adverse opinion Unqualified opinion
59. An unqualified opinion should be expressed when the auditor and the audit firm concludes that
the final accounts of investment give a true and fair view, in all material respects, of the finalization of investment funds by the project under audit in accordance with the prevailing accounting standards and systems and relevant statutory regulations.
60. An unqualified opinion is also expressed in the cases where the final accounts of investment contain
misstatements as detected by the auditor, which have, upon their recommendations, been adjusted by the entity and that the adjusted accounts are accepted by the auditor. The wording for this paragraph should be "In our opinion, the final accounts of investment, upon the adjustment made thereon at the auditor's recommendation, with the total invested fund of VND, give a true and fair view, in all material respects, of the finalization of investment funds at the reporting date, in accordance with prevailing accounting standards and systems and relevant statutory regulations.
168
61. The unqualified opinion does not necessarily mean that the final accounts of investment are completely
accurate but that they may contain certain misstatements, which, in the auditor's judgments, are not material. (Refer to Appendix 04) Qualified opinion
62. A qualified opinion is expressed in the auditor's report when the auditor and the audit firm
determine that the final accounts of investment only give a true and fair view of the finalization of investment funds by the entity should it be affected by the "subject to" (or "except for") factors discussed in the auditor's report. This also means that if such factors raised therein had material impacts on the final accounts of investment, these accounts would fail to give a true and fair view in all material respects. "Subject to" factors shows matters that are material but not as certain as the issues resolved by an authorized approver of final accounts of investment in connection with the investment costs of a construction item or work of the project.
63. The "subject to" factors are normally associated with events predicted to be occurring in the future,
which are beyond the auditor and the entity's controls, or matters remaining unidentified in prevailing statutory regulations the resolution of which rests with the jurisdiction of the person who resolves the matter. The expression of an opinion with "subject to" factor support the discharge of the auditor's responsibility in connection with the audit while still drawing the attention of users of the audited final accounts of investment for follow-up of any likely events or causing the authorized approver of the final accounts to formally resolve the issue. Illustration of an auditor's report with "subject to" factors: "In our opinion, in all material respects, the final accounts of investment upon the adjustment made thereon at the auditor's recommendation, with the total invested fund of VND give a true and fair view, in all material respects, of the finalization of investment funds at the reporting date, in accordance with prevailing accounting standards and systems and relevant statutory regulations, subject to:
The costs of Work Item A3 for which an addendum is pending approval in the amount of XY1VND as accepted by competent authorities; The intended costs for verifying the final accounts in the amount of XV2VND as will be approved by competent authorities when actually incurred; and The test-run costs in the amount of XY3VND as approved by competent authorities.
64. A qualified opinion should be expressed when the auditor concludes that an unqualified opinion
cannot be expressed but that the effect of any disagreement with management, or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. A qualified opinion should be expressed as being except for the effects of the matter to which the qualification relates as "In our opinion, except for the effects (if any) of the matters referred to above, the final accounts of investment give a true and fair view, in all material respects,... Disclaimer of opinion
65. A disclaimer of opinion should be expressed when the possible effect of a limitation on scope is
so material and pervasive that the auditor is not furnished with sufficient final accounts dossiers in regards of such a large amount of items that the auditor is unable to express an opinion on the final accounts of investment, using a paragraph that reads "Because of the significance of the matters discussed in the preceding paragraph, we do not express an opinion on the final accounts of investment. An adverse opinion
66. An adverse opinion should be expressed when the effect of a disagreement is so material and
pervasive to such a large amount of items that the auditor and the audit firm concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the
169
final accounts of investment, using the paragraph that reads "In our opinion, due to the material effects of the matters referred to above, the final accounts of investment do not give a true and fair view, in all material respect, ". Whenever the auditor expresses an opinion that is other than unqualified, which are qualified, disclaimer of or adverse opinions, a clear description of all the substantive reasons should be included in the report and, unless impracticable, a quantification of the possible effect(s) on the final accounts of investment. Ordinarily, this information would be set out in a separate paragraph preceding the opinion paragraph. Treatment of events subsequent to the auditor's report date
67. Where errors are detected in connection with the audit results or an event is found as having material
effects on the expressed audit opinion subsequent to the date of the auditor's report on the final accounts of investment, the auditor and audit firm can take the actions that follow: a) Where the auditee entity accepts to revise the final accounts of investment, the auditor would re-issue the auditor's report in regards of the adjusted final accounts of construction and keep the addressees of the change of opinion. b) Where the entity would otherwise refuse to do so, the auditor would take all necessary measures to keep those who have received or will receive the audited final accounts of investment and the auditee entity promptly informed of the fact. Documentation
68. The auditor should obtain and record in the audit file all documentation and information
which are important in providing evidence to support the audit opinion and evidence that the audit was carried out in accordance with VSAs. The audit documentation should be sufficiently complete and detailed to provide other auditors or examiners/reviewers with an overall understanding of the audit. The auditor should prepare and maintain documentation on an audit of final accounts of investment in accordance with VSA230, Documentation. (Refer to paragraphs 69 through 77 for major guidance)
69. The auditor should obtain and record in the audit file all documents and information in relation to:
a) The audit planning; b) The audit performance: nature, timing and extent of conducted audit procedures; c) The results of procedures conducted; d) The conclusions drawn from the audit evidence obtained. Audit documentation would include the auditor's reasoning on all significant matters which require the exercise of professional judgment, together with the auditor's conclusion thereon. In areas involving difficult questions of principle or judgment, documentation will record the relevant facts that were known by the auditor at the time the conclusions were reached. Audit documentation also records the results from tests and reviews of the quality of an audit by authorized persons as regulated by the audit firm.
70. Audit documentation is designed and organized in the format established by the audit firm.
The auditor may utilize schedules, analyses, working papers and other documents prepared by the entity provided the auditor needs to be satisfied that those materials have been properly prepared. As required under the circumstances, the auditor should retain with the audit documentation the client's documents that the auditor finds necessary and essential for their opinion on the final accounts of investment.
71. Audit documentation should be prepared and arranged by respective clients and
engagements according to the requirements and conditions of the auditor and the audit
170
firm. The use of standardized working papers (checklists, specimen letters, standard working papers etc) may improve the efficiency with which such documentation is prepared and reviewed. They facilitate the delegation of work and control over quality.
72. Audit documentation should be prepared and arranged into:

Permanent audit file; and Current audit file
74. Permanent audit files ordinarily include:

Name and number of the documentation, date of preparation and filing. General information on the project and the auditee entity: - Extracts or copies of important legal documents, agreements and minutes: project documents, investment decisions, design ratifications, budget estimations; tender plan resolutions; minutes of relevant management members meetings; - Tax documents: written rules and policies applicable to the project as approved by competent authorities and documents on performance of annual tax obligations;
- Personnel and organization records: establishment decisions; names, addresses, functions and
operation scope and organizational structure of the auditee entity; regulations on personnel and utilization of payrolls; - Internal rules on management of construction investment: processes of work verification and settlement; and - Other related documents.

Audit contracts, contract appendixes (if any), contract liquidations. Information on preparers, verifiers and reviewers of audit documentation: - Names of the auditor and assistants involved in the audit performance and documents preparation; - Names of the reviewer and date of review; and - Name of the approver and date of approval. Audit planning: - Evidence of the audit strategy and planning process, including the audit program and any changes thereto; - Evidence about changes in the accounting and internal control systems of the auditee entity; and - Evidence and conclusions of inherence and control risk assessments and any revisions thereof;

The final accounts of investment prepared by the auditee entity prior to the audit. A summary of the audit results and draft and final audit reports. Representations letters by the Director (or leader) of the auditee entity. Written confirmations by the auditee entity and a third party. Other documents. The audit program and related procedures performed and the results thereof. Documents and records pertaining to construction works and items, blue prints. individual estimates, tender invitations, test minutes, as-built drawings, work accounts. Computations by technicians. Working minutes in details.
74. Current audit files ordinarilly include:

171
Other documents.
75. The auditor and the audit firm should keep the audit documentation confidential and safeguarded. Audit documentation should be retained over a period of 10 years or longer to meet the need of the audit practice and in accordance with the statutory regulations on the maintenance and filing of accounting documents and guidelines established by the accountancy bodies and audit firm. Audit documentation should be arranged and filed in a proper and orderly fashion to facilitate the accessibility and reference and gathered at the firm's achieve office. Where an audit firm has branches or offices in the localities, audit documentation should be kept at the office where the auditor's report is signed and stamped. 76. Audit documentation is the property of the auditor and audit firm. The client and third parties are entitled to access to and use of portion or extracts of the documentation upon the consents of the Director of the audit firm or otherwise under statutory or professional requirements. In no case is audit documentation a substitute for the client's accounting records or final accounts of investment. 77. As with an audit of the final accounts of investment of a C-group project, the audit firm should adhere to the guidelines provided for in paragraphs 68 through 76 of this standard to make the documentation taking into account the size of the project under audit. 78. Appendices: Appendix 01 - Audit contract Appendix 02 - Overall audit plan Appendix 03 - Audit program Appendix 04 - Auditor's report (unqualified opinion). Appendix 01 EXAMPLE OF AUDIT CONTRACT (For guidance and reference) ------------------------------------AUDIT FIRM .. Address, tel. and fax, email No. /HDKT AUDIT CONTRACT (Audit of Final Accounts of Investment) Project ................................................. of ......................................................

SOCIALIST REPUBLIC OF VIETNAM Independence - Freedom - Happiness ------------------------------------------------, day month year
Pursuant to the Economic Contract Ordinance and Decree No... dated of the Government specifying the implementation of the Economic Contract Ordinance; Pursuant to Decree No. 105/2004/ND-CP dated 30 March 2004 of the Government on independent audit; Pursuant to Decree No dated of the Government providing for investment and construction management; In conformity with VSA 210, Term of Audit Engagement; and VSA 1000, Audit of Final Accounts of Investment.
Party A: Company (Project Management)(hereinafter referred to as Party A) Represented by:............. Position:. Tel.:.... Fax:.... Address:.
172
Account No.: At Bank of .......... Party B: Audit Firm (Hereinafter referred to as Party B) Represented by:. Position:. Tel.:.... Fax:.... Address:. Account No.: At Bank of ...... The parties hereby agree upon the following terms and conditions: Article 1: Description of Services Party B shall provide Party A with an audit of the final accounts of investment of Project of... Article 2: Governing Laws and Standards The engagement is conducted in accordance with Vietnamese Accounting Standards and Vietnamese Standards on Auditing and in conformity with legal documents issued by the State for use in the field of capital construction, taking into account Party As circumstances and written agreements reached during the implementation. The audit results shall be objective, practical and confidential. Those standards require that Party B plan and perform the audit to obtain reasonable assurance that the final accounts of investment are free of material misstatement. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the final accounts of investment. Due to the inherent limitations associated to an audit and the accounting and internal control systems, there might be risks that are beyond the capacity of the auditor and the audit firm in the detection of material misstatement. Article 3: Responsibilities of the Parties 3.1. Party A shall:

retain and manage accounting vouchers and books, estimation documents, blue prints, final accounts and other dossiers and documents on the project as statutorily required; supply Party B, in a timely manner, sufficient information and documents relating to the audit in accordance with the prevailing regulations, including project investment decisions, technical designs, budget estimations, as-built drawings, verification minutes, logbooks, A-B finalizations, final accounts of investment and other dossiers and records relating to the project and assume accountability for documents delivered to Party B, delegate responsible personnel to work with Party B to explain and measure work contents as may be required by Party B; formally sign and stamp the final accounts of investment prior to producing them to Party B. The true and fair presentation of the financial statements and presentation of related information is the responsibility of Party A. This responsibility requires that the accounting and internal control systems should be appropriate, the selection and application of accounting policies adequate and the safeguarding of assets proper; require from time to time a written confirmation from Party A on the reliability of documents and information provided; delegate responsible personnel to work with and give Party B access to all accounting books and records, documents and other information required for the audit; facilitate Party B's observation and survey at site as may be required by Party B; and make full payment of the audit fee to Party B on a contractual basis.
3.2. Party B shall:
173
ensure to follow the prevailing standards on auditing (as specified in Article 2); develop and inform Party A of the work contents and audit plan; implement the work according to plan and with respect to the principles of independence, objectiveness and confidentiality; keep regular communication and discussion with Party A for settlement of queries in the audit and meet the time table and work quality mutually agreed; and deliver the auditor's report to Party A as scheduled and assume responsibility for the integrity, objectivity, and validity of the information and data disclosed in the auditor's report;
Article 4: Reporting Upon completion of the audit, Party B shall deliver to Party A:

An auditor's report; and A management letter (if applicable) which discusses the findings and recommendations concerning the weaknesses noted aiming to further improving the accounting and internal control systems.
The auditor's report and management letter (if any) shall be prepared in copies. Party A shall retain. copies and Audit Firm copies. Article 5: Fee and Payment Method

The total fee is:................... (In words:) Payment of the fee shall be made (As agreed).
The fee shall be paid either in cash or by transfer and billed in Vietnam dong (VND). Article 6: Commitments and Due Dates Both parties commit to implement all articles as set forth herein. During the implementation, either party should be kept promptly informed of any problems that might obstruct the successful completion of this contract to discuss possible solutions. Information shall be directed to the other party in writing at the above address. The audit shall be due for completion within days beginning... Article 7: Effectiveness, Language and Duration of Contract This contract shall be made in copies and shall come into force upon the second signature and stamp. Either party shall retain copies in Vietnamese. This contract shall remain in effect until certification of completion or cancellation of contract as may be agreed by both parties. Party B AUDIT FIRM Director (Full name, signature and seal) Appendix 02 EXAMPLE OF OVERALL AUDIT PLAN (for guidance and reference) ------------------------------------AUDIT FIRM OVERALL AUDIT PLAN Client entity: Project: Prepared by Approved by Date Date Party A ............................................. Director (Full name, signature and seal)
1. Information about the client and the project:
174
Client name:....................................................................................................................... Head office: ...................................................................................................................... Phone no: ...................... Fax no:......................Email:...................................................... Tax code: .......................................................................................................................... Operation license (Investment license, business registration certificate)........................ Project name: ................................................................................................................... Total investment: Construction: .................................................................................. Equipment: ..................................................................................... Others: ............................................................................................ Investment fund: State budget: .................................................................................... Loan: Local: .................................................................................... Overseas: .............................................................................. Others: ............................................................................................. Project size: ...................................................................................................................... Location:.................................................................................................................... Commencement date: .................................... Completion date:...................................... Major civil works and items: No Works and items Work item A Work item B ....... Project management:............................................................................ Contractors:....................................................................................................................... Constructors:...................................................................................................................... Suppliers: .......................................................................................................................... Consultants: ...................................................................................................................... Major change and adjustment during the project implementation: ........................................................................................................................................... Special events affecting the project operation:.............................................. Transaction bank/Financing agency: ........................................ Client key personnel involved: Full name Position Degree Notes Approved estimates Final accounts Contract type Package Adjusted contract contract Appointed contract
Summary on client internal controls:........................................ Managerial capacity:............................................................. 2. Understanding of accounting and internal control systems:
175
Based on the review of the client's final accounts of investment and understanding of its business to consider the level of effects on the preparation of final accounts of investment in terms of: + the accounting policies adopted by the entity and changes in those policies:................. + the effect of new accounting and auditing policies: .............. + the accounting staff: .............................................. + Technical and management personnel:.............................. + Reporting requirement:............................................................... Assessing the control environment, accounting system, and internal controls as reliable and effective: High Risk assessment: + Inherent risk: High + Control risk: High Medium Low + Assessment of internal controls operations: Materiality measurement: Key indicators for measuring materiality levels include: Total investment Total estimates Construction costs Equipment costs Other costs Medium Low Medium Low 3. Risk assessment and materiality measurement:
Reason for choice of materiality level: ......................................... Assessment of materiality levels for each audit objective......... The possibility of material misstatement from the auditor experience for the project; and the identification of complex accounting transactions, costs and civil works/items. - Account audit approach: + Sample test.................................................................................. + Key item test............................................................................... + 100% examination ..................................................................... 4. Co-coordinated direction, supervision and review The involvement of legal and other experts Timing schedule:................................................................... Staffing requirement: .................................................................... + In-charge director (deputy director)........................................... + In-charge manager .................................................................... + Audit team head .........................................................................
176
+ Audit assistant 1 ........................................................................ + Audit assistant 2 ........................................................................ 5. Other matters Conditions requiring special attention:..................................... The terms of the engagement and any statutory responsibilities:..........................
The nature and timing of reports or other communication with the entity:.............. .................................................................... 6. Overall audit plan summary: No. 1 2 3 4 Significant items Inherent risk Control risk Mat'lity level Audit approach Audit procedures Ref.
....... General classification of Client: Important Not important
Very important
Other: Appendix 03 EXAMPLE OF AUDIT PROGRAM (for guidance and reference) -----------------------------------------------------------------------------AUDIT FIRM: CONSTRUCTION COSTS AUDIT PROGRAM Client entity: Project Determination of detailed risk Detailed risks are identified in this audit program are as follows: No. Detailed risk Audit approach Audit procedures Work performer Assessment/ Reference Prepared by Approved by Date Date
(These risks are also identified during audit planning) SUBSTANTIVE PROCEDURES This program is subject to revision or supplementation if it is in the audit team's opinion that the procedures incorporated into the program are not inclusive of all relevant inherent considerations or are inadequate with the lack of instructive information about materiality concerning this type of costs in the circumstances for each audit. GENERAL AUDIT PROCEDURES 1. GENERAL EXAMINATION OF CONSTRUCTION COSTS
177
2. DETAILED EXAMINATION OF CONSTRUCTION COSTS 3. ............. Specific audit procedures 1 GENERAL EXAMIN. OF CONSTRUCTION COSTS A. Collect construction costs summaries by years 1. Check addition 2. Reconcile addition to ledgers and final accounts B. Perform analysis procedures on construction costs 1. Check movement of construction costs to approved estimates by items. 2. Assess examination results 2 DETAILED EXAMIN. OF CONSTRUCTION COSTS A. Upon analysis of construction costs, examine and check evidence that follows: 1. Costs sheets 2. Bank vouchers on settlement and allocation 3. Summary of payments to constructors 4. Assessment of examination results and confirmation that construction costs are all accounted for. B. Examine construction costs of civil works to ensure that: 1. Finalized works agrees with costs incurred and are as statutorily regulated. 2. Adopted prices are as statutorily and internally mandated. 3. Adopted norms are as statutorily and internally mandated. 4. Adopted rates of inflation, surcharge, materials compensation are as statutorily and internally prescribed. 5. Assess test results Performer Reference
Appendix 04 EXAMPLE OF UNQUALIFIED REPORT -------------------------------------------------
178
XYZ AUDIT FIRM (Address, tel. and fax, email...) No... AUDITOR'S Re. Final Accounts of Investment Project........................................... of ABC Project Management To: ABC Project Management We have audited the final accounts of investment of Project prepared on by ABC Project Management set out on pages to 1. Respective Responsibilities of the Project Management and Auditors These final accounts of investment are the responsibility of the Project management. Our responsibility is to express an opinion on these final accounts based on our audit. 2. Audit Scope and Basis LEGAL BASIS (Indicate the legal documents issued by the State governing the investment and construction management) FINAL ACCOUNTS DOSSIERS (Indicate the documents making up the final accounts dossiers supplied to auditors) BASIS OF OPINION We conducted our audit in accordance with Vietnamese Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance that the final accounts of investment are free of material misstatement. On the basis of the documents you supplied, we reviewed the final accounts of investment of Project of ABC Project management in accordance with (Circular No. 45/2003/TT-BTC dated May 15, 2003 of the Ministry of Finance), including the following items of work: - Review of project legal documents; - Investigation of investment funds; - Verification of construction costs; - Verification of equipment costs; - Verification of other costs - Determination of costs excluded from constructed assets; - Test of assets handed over for use; and - Test of outstanding debtors and creditors, materials and equipment left over. To perform the foregoing items of work, we reviewed accounting documents and records relating to the project, verified the final costs of bid packages, and determined other costs. Our work also included reconciling the amount of work completed with approved designs and estimates, variation forecasts, verification minute, as-built drawings and checking adopted norms, local indexes and approved price of construction and other testing procedures as we considered necessary in the circumstances. 3. Audit results Background of the project: Disclose a project overview Final accounts dossiers: (Whether documents are sufficient or insufficient? Whether auditors were engaged in compiling the final accounts dossiers?) Legality of the project investment process: REPORT
179
Lists and contents of legal documents: (State whether or not lists and contents of legal documents with regards to project investment are in accordance with current statutory regulations). Validity and implementation of the economic contract: (State whether or not implementing the construction contract is in accordance with the current statutory regulations). Funds for construction investment: Resources Unit: VND Items 1 - State budget - Loan fund - Others Total Investment Costs Unit: VND No. Items 1 2 Construction costs Equipment costs Other costs Contingencies Total APPROVED ESTIMATES 3 Actual Per accounts 4 final Audit results 5 Difference (*) 6=5-4 APPROVED INVESTMENT 2 Actual Per accounts 3 final Audit results 4 Difference (*) 5=4-3
Causes of differences (if any)
Investment Costs Proposed to be Excluded from Constructed Assets No. 1 1 2 Items 2 Cost ...... Cost...... Total Per final Audit accounts Results 3 4 Unit: VND Difference (*) Note 5=4-3 6
Cost of Constructed Assets No. 1 1 2 Items 2 Fixed assets Current assets Total Per final Audit accounts results 3 4 Difference (*) 5=4-3 Unit: VND Note 6
Debtors and Creditors Unit: VND
180
No. 1 I II
Creditor and debtor 2 Debtor Creditor
Per final Audit accounts results 3 4
Difference (*) 5=4-3
Note 6
Costs of Materials and Equipment Left Over: No. Items 1 I II 2 Materials Equipment Per final Audit accounts results 3 4 Difference (*) 5=4-3 Unit: VND Note 6
(*) For noted differences, there should be an appendix for causes. 4. Disclosure of reasons: This is required if the opinion (paragraph 5) is either a qualified, adverse, or disclaimer of opinion (as guided in paragraphs 62, 65 and 66 herein). 5. Opinion: On the basis of the documents and information you supplied, in our opinion, the accompanying final accounts of investment with the total amount of give a true and fair view, in all material respects, of the settled investment costs at the accounts date and in accordance with the current accounting standards and systems and relevant statutory regulations. 6. Recommendations: ... .. .. ..., day month year... XYZ AUDIT FIRM Director (Full name, signature and seal) CPA Certificate No...
Auditor (Full name and signature) CPA Certificate No...
181
Standard No 260 Communications of audit matters with those charged with governance
STANDARD 260 COMMUNICATIONS OF AUDIT MATTERS GOVERNANCE (Issued in pursuance of the Minister of Finance Decision No. 101/2005/QD-BTC dated 29 December 2005) GENERAL
WITH
THOSE
CHARGED
WITH
1.The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide guidance on communication of audit matters arising from the audit of financial statements between the auditor and the audit firm and those charged with governance of an entity. 2. The auditor and the audit firm should communicate audit matters of governance interest arising from the audit of financial statements with those charged with governance of an entity. 3. This VAS applies to communications of audit matters between the auditor and the audit firm and those charged with governance. This VAS does not specify how the auditor communicates with those outside the audited entity. The auditor and the audit firm should comply with this VSA in conducting an audit of financial statements and rendering related services. It is expected that the audited (client) entity and users of the audit report should possess essential knowledge as to the objective and general principles set out in this VSA in working with the auditor and the audit firm and dealing with the relations maintained during the audit. In this VSA, the following terms have the meaning attributed below:
2. Management refers to persons entrusted with the supervision, control and direction of an entity
and the decison making for its operation and development, consisting of members of the Board of Management, Board of Directors and Control Committee and those charged with managing business areas.
3. Governance is the term used to describe the role of persons entrusted with managing, supervising
and controling a particular area of business or directing and executing a legal entity. Those charged with governance ordinarily are accountable for ensuring that the entity achieves its objectives, supervising the operations and reporting to interested parties.
6.
Audit matters of governance interest are those that arise from the audit of financial statements and, in the opinion of the auditor and the audit firm, are both important and relevant to those charged with governance in overseeing the financial reporting and disclosure process. The auditor is not required to identify and report to management of the entity all matters of governance interest. CONTENTS OF THE VSA 7. The auditor and the audit firm should determine the relevant persons who are charged with governance and with whom significant matters, including audit matters of governance interest, are communicated. 8. The auditor should determine the structure and principles of governance of each entity, such as the overseeing function (Control Committee) and executing function of the Board of Directors and the Board of Management. 9. The auditor should identify the persons who are charged with governance and whom the auditor communicates audit matters of governance interest. 10. When the entitys governance structure is not well defined, or those charged with governance are not clearly identified, the auditor comes to an agreement with the entity about with whom audit matters of governance interest are to be communicated.
182
11. To avoid misunderstandings, an audit engagement letter may explain that the auditor will communicate only those matters of governance interest that come to attention as a result of the performance of an audit and that the auditor is not required to design audit procedures for the specific purpose of identifying matters of governance interest. The engagement letter may also: made; and communicated. Identify the relevant persons with whom such communications will be Identify any specific audit matters of governance interest to be
12. The effectiveness of communications is enhanced by developing a constructive working relationship between the auditor and those charged with governance. This relationship is developed while maintaining an attitude of professional independence and objectivity. Audit Matters of Governance Interest to be Communicated 13. The auditor should consider significant matters, including audit matters of governance interest that arise from the audit of the financial statements and communicate them with those charged with governance. Ordinarily such matters include the following: a) The general approach and overall scope of the audit, including any expected limitations thereon, or any additional requirements; b) The selection of, or changes in, significant accounting policies and practices that have, or could have, a material effect on the entitys financial statements; c) The potential effect on the financial statements of any material risks and exposures, such as pending litigation, that are required to be disclosed in the financial statements; d) Audit adjustments, whether or not recorded by the entity that have, or could have, a material effect on the entitys financial statements; e) Material uncertainties related to events and conditions that may cast significant doubt on the entitys ability to continue as a going concern; f) Disagreements with management about matters that, individually or in aggregate, could be significant to the entitys financial statements or the auditors report; g) Expected modifications to the auditors report; h) Other matters warranting attention by those charged with governance, such as material weaknesses in internal control, questions regarding management integrity, and fraud involving management; and i) engagement. Any other matters agreed upon in the terms of the audit
14. As part of the auditors communications, those charged with governance are informed of the following signifcant matters: a) The auditors communications of the audit results; and b) The fact that an audit of financial statements is not designed to identify all matters that may be relevant to those charged with governance. Accordingly, the auditor and the audit firm do not ordinarily identify all such matters. Timing of Communications
15.
The auditor should communicate significant matters, including audit matters of governance interest, on a timely basis. This enables those charged with governance to take appropriate and prompt action. 16. In order to achieve timely communications, the auditor discusses with those charged with governance the basis and timing of such communications. In certain cases, because of the nature of the matter, the auditor may communicate that matter sooner than previously agreed.
183
Forms of Communications 17. The auditors communications with those charged with governance may be made orally or in writing. The auditor and the audit firms decision whether to communicate orally or in writing is affected by factors such as the following: a) The size, operating communications processes of the entity being audited; structure, legal structure, and
b) The nature, sensitivity and significance of the audit matters of governance interest to be communicated; c) The arrangements made with respect to periodic meetings or reporting of audit matters of governance interest; and d) The amount of on-going contact and dialogue the auditor has with those charged with governance. 18. When audit matters of governance interest are communicated orally, the auditor documents in the working papers the matters communicated and any responses to those matters. This documentation may take the form of a copy of the minutes of the auditors discussion with those charged with governance. In certain circumstances, depending on the nature, sensitivity, and significance of the matter, it may be advisable for the auditor and the audit firm to confirm in writing with those charged with governance any oral communications on audit matters of governance interest. 19. Ordinarily, the auditor initially discusses audit matters of governance interest with management, except where those matters relate to questions of management competence or integrity. These initial discussions with management enable the auditor to gather further information from the audit. If management agrees to communicate a matter of governance interest with those charged with governance, the auditor may not need to repeat the communications, provided that the auditor is satisfied that such communications have effectively and appropriately been made. When the auditor is satisfied with information obtained after communicating with management of the entity, the auditor is not required to discuss the information with any others of those charged with governance. Other Matters 20. If the auditor considers that a modification of the auditors report on the financial statements is required, as described in VSA 700 The Auditors Report on Financial Statements communications between the auditor and those charged with governance cannot be regarded as a substitute. 21. The auditor and the audit firm consider whether audit matters of governance interest previously communicated may have an effect on the current years financial statements. The auditor considers whether the point continues to be a matter of governance interest and whether to communicate the matter again with those charged with governance. Confidentiality 22. When legal documents provide regulations on confidentiality that restrict communication of audit matters of governance interest arising from the audit of financial statements, the auditor and the audit firm refer to such regulations before communicating with those charged with governance. In some circumstances, the potential conflicts with the auditors ethical and legal obligations, the auditor may wish to consult with legal counsel. Laws and Regulations 23. When the requirements of legal documents impose obligations on the auditor and the audit firm to make communications on governance related matters that are not covered by this VSA, the auditor and the audit firm should comply with these requirements.
184
Standard No 330 The auditors procedures in response to assessed risks
STANDARD 330 THE AUDITORS PROCEDURES IN RESPONSE TO ASSESSED RISKS
GENERAL 1.The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide guidance on determining overall responses and designing and performing further audit procedures to respond to the assessed risks of material misstatement at the financial statement and assertion levels in a financial statement audit. 2.The auditor and the audit firm should obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of material misstatement of the financial statements whether due to fraud or error, and sufficient to design and perform further audit procedures. 3.This VAS applies to audits of financial statements and also applies to audits of other financial information, and related services rendered by the audit firm. The auditor and the audit firm should comply with this VSA in conducting an audit of financial statements. It is expected that the audited (client) entity and users of the audit report should possess essential knowledge as to the objective and general principles set out in this VSA in working with the auditor and the audit firm and dealing with relations relevant to audited information. 4.The following is an overview of the requirements of this standard: Overall responses: This section requires the auditor and the audit firm to determine overall responses to address risks of material misstatement at the financial statement level and provides guidance on the nature of those responses. Audit procedures responsive to risks of material misstatement at the assertion level: This section requires the auditor to design and perform further audit procedures, including tests of the operating effectiveness of controls, when relevant or required, and substantive procedures, whose nature, timing, and extent are responsive to the assessed risks of material misstatement at the assertion level. In addition, this section includes matters the auditor and the audit firm consider in determining the nature, timing, and extent of such audit procedures. Evaluating the sufficiency and appropriateness of audit evidence obtained: This section requires the auditor to evaluate whether the risk assessment remains appropriate and to conclude whether sufficient appropriate audit evidence has been obtained. Documentation: This section requires that the contents and documents in the audit documentation contain information relevant to assessed risk.
5. In order to reduce audit risk to an acceptably low level, the auditor and the audit firm
should determine overall responses to assessed risks at the financial statement level, and should design and perform further audit procedures to respond to assessed risks at the assertion level. The overall responses and the nature, timing, and extent of the further audit procedures are matters for the professional judgment of the auditor. In addition to the requirements of this VSA, the auditor and the audit firm also comply with the requirements and guidance in VSA 240 Fraud and Error in responding to assessed risks of material misstatement due to fraud. CONTENTS OF THE VSA Overall Responses
6. The auditor should determine overall responses to address the risks of material
misstatement at the financial statement level. Such responses may include emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence, assigning more experienced staff or those with special skills or using experts, providing more supervision, or incorporating additional elements of unpredictability in the selection of further audit
185
procedures to be performed. Additionally, the auditor and the audit firm may make general changes to the nature, timing, or extent of audit procedures as an overall response, for example, performing substantive procedures at period end instead of at an interim date. 7. The assessment of the risks of material misstatement at the financial statement level is affected by the auditors understanding of the control environment. An effective control environment may allow the auditor to have more confidence in internal control and the reliability of audit evidence generated internally within the entity and thus, for example, allow the auditor to conduct some audit procedures at an interim date rather than at period end. If there are weaknesses in the control environment, the auditor ordinarily conducts more audit procedures as of the period end rather than at an interim date, seeks more extensive audit evidence from substantive procedures, modifies the nature of audit procedures to obtain more persuasive audit evidence, or increases the number of locations to be included in the audit scope. 8. Such considerations, therefore, have a significant bearing on the auditors general approach, for example, an emphasis on substantive procedures (substantive approach), or an approach that uses tests of controls as well as substantive procedures (combined approach). Audit Procedures Responsive to Risks of Material Misstatement at the Assertion Level
9. The auditor and the audit firm should design and perform further audit procedures whose
nature, timing, and extent are responsive to the assessed risks of material misstatement at the assertion level. The purpose is to provide a clear linkage between the nature, timing, and extent of the auditors further audit procedures and the risk assessment. In designing further audit procedures, the auditor and the audit firm consider such matters as the following: a) b) c) The significance of the risk; The likelihood that a material misstatement will occur; The characteristics of the class of transactions, account balance, or disclosure involved;
d) The nature of the specific controls used by the entity and in particular whether they are manual or automated; and e) Whether the auditor expects to obtain audit evidence to determine if the entitys controls are effective in preventing, or detecting and correcting, material misstatements. 10. The auditors assessment of the identified risks at the assertion level provides a basis for considering the appropriate audit approach for designing and performing further audit procedures. In some cases, the auditor may determine that only by performing tests of controls may the auditor achieve an effective response to the assessed risk of material misstatement for a particular assertion. In other cases, the auditor may determine that performing only substantive procedures is appropriate for specific assertions and, therefore, the auditor excludes the effect of controls from the relevant risk assessment. This may be because the auditors risk assessment procedures have not identified any effective controls relevant to the assertion, or because testing the operating effectiveness of controls would be inefficient. However, the auditor needs to be satisfied that performing only substantive procedures for the relevant assertion would be effective in reducing the risk of material misstatement to an acceptably low level. Often the auditor may determine that a combined approach using both tests of the operating effectiveness of controls and substantive procedures is an effective approach. Irrespective of the approach selected, the auditor designs and performs substantive procedures for each material class of transactions, account balance, and disclosure as required by paragraph 51. 11. In the case of very small entities, there may not be many control activities that could be identified by the auditor. For this reason, the auditors further audit procedures are likely to be primarily substantive procedures. In such cases, in addition to the matters referred to in paragraph 10 above, the auditor and the audit firm consider whether in the absence of controls it is possible to obtain sufficient appropriate audit evidence. Considering the Nature, Timing, and Extent of Further Audit Procedures Nature
186
12. The nature of further audit procedures refers to their purpose (tests of controls or substantive procedures) and their type, that is, inspection, observation, inquiry, confirmation, recalculation, reperformance, or analytical procedures. Certain audit procedures may be more appropriate for some assertions than others. For example, in relation to revenue, tests of controls may be most responsive to the assessed risk of misstatement of the completeness assertion, whereas substantive procedures may be most responsive to the assessed risk of misstatement of the occurrence assertion. 13. The auditors selection of audit procedures is based on the assessment of risk. The higher the auditors assessment of risk, the more reliable and relevant is the audit evidence sought by the auditor from substantive procedures. This may affect both the types of audit procedures to be performed and their combination. For example, the auditor may confirm the completeness of the terms of a contract with a third party, in addition to inspecting the document. 14. In determining the audit procedures to be performed, the auditor considers the reasons for the assessment of the risk of material misstatement at the assertion level for each class of transactions, account balance, and disclosure. This includes considering both the particular characteristics of each class of transactions, account balance, or disclosure (i.e., the inherent risks) and whether the auditors risk assessment takes account of the entitys controls (i.e., the control risk). For example, if the auditor considers that there is a lower risk that a material misstatement may occur because of the particular characteristics of a class of transactions without consideration of the related controls, the auditor may determine that substantive analytical procedures alone may provide sufficient appropriate audit evidence. On the other hand, if the auditor expects that there is a lower risk that a material misstatement may arise because an entity has effective controls and the auditor intends to design substantive procedures based on the effective operation of those controls, then the auditor performs tests of controls to obtain audit evidence about their operating effectiveness. This may be the case, for example, for a class of transactions of reasonably uniform, non-complex characteristics that are routinely processed and controlled by the entitys information system. 15. The auditor is required to obtain audit evidence about the accuracy and completeness of information produced by the entitys information system when that information is used in performing audit procedures. For example, if the auditor uses non-financial information or budget data produced by the entitys information system in performing audit procedures, such as substantive analytical procedures or tests of controls, the auditor obtains audit evidence about the accuracy and completeness of such information to comply with VSA 500 Audit Evidence. Timing 16. Timing refers to when audit procedures are performed or the period or date to which the audit evidence applies. 17. The auditor may perform tests of controls or substantive procedures at an interim date or at period end. The higher the risk of material misstatement, the more likely it is that the auditor may decide it is more effective to perform substantive procedures nearer to, or at, the period end rather than at an earlier date, or to perform audit procedures unannounced or at unpredictable times (for example, performing audit procedures at selected locations on an unannounced basis). On the other hand, performing audit procedures before the period end may assist the auditor in identifying significant matters at an early stage of the audit, and consequently resolving them with the assistance of management or developing an effective audit approach to address such matters. If the auditor performs tests of controls or substantive procedures prior to period end, the auditor considers the additional evidence required for the remaining period (see paragraphs 39-40 and 58-63). 18. In considering when to perform audit procedures, the auditor also considers such matters as the following: a) b) c) The control environment; When relevant information is available (for example, procedures to be observed may occur only at certain times); The nature of the risk (for example, if there is a risk of inflated revenues to meet earnings expectations by subsequent creation of false sales agreements, the auditor may wish to examine contracts available on the date of the period end); and
187
d)
The period or date to which the audit evidence relates.
19. Certain audit procedures can be performed only at or after period end, for example, agreeing the financial statements to the accounting records and examining adjustments made during the course of preparing the financial statements. If there is a risk that the entity may have entered into improper sales contracts or transactions may not have been finalized at period end, the auditor performs procedures to respond to that specific risk. For example, when transactions are individually material or an error in cutoff may lead to a material misstatement, the auditor ordinarily inspects transactions near the period end. Extent 20. Extent includes the quantity of a specific audit procedure to be performed, for example, a sample size or the number of observations of a control activity. The extent of an audit procedure is determined by the judgment of the auditor after considering the materiality, the assessed risk, and the degree of assurance the auditor plans to obtain. In particular, the auditor ordinarily increases the extent of audit procedures as the risk of material misstatement increases. However, increasing the extent of an audit procedure is effective only if the audit procedure itself is relevant to the specific risk; therefore, the nature of the audit procedure is the most important consideration. 21. The use of computer-assisted audit techniques (CAATs) may enable more extensive testing of electronic transactions and account files. Such techniques can be used to select sample transactions from key electronic files, to sort transactions with specific characteristics, or to test an entire population instead of a sample. 22. Valid conclusions may ordinarily be drawn using sampling approaches. However, if the quantity of selections made from a population is too small, the sampling approach selected is not appropriate to achieve the specific audit objective, or if exceptions are not appropriately followed up, there will be an unacceptable risk that the auditors conclusion based on a sample may be different from the conclusion reached if the entire population was subjected to the same audit procedure. VSA 530 Audit Sampling and Other Selective Testing Procedures contains guidance on the use of sampling. This VSA regards the use of different audit procedures in combination as an aspect of the nature of testing as discussed above. However, the auditor considers whether the extent of testing is appropriate when performing different audit procedures in combination. 24. The auditor is required to perform tests of controls when the auditors risk assessment includes an expectation of the operating effectiveness of controls or when substantive procedures alone do not provide sufficient appropriate audit evidence at the assertion level.
23.
Tests of Controls
25. The auditors assessment of risks of material misstatement at the assertion level includes an
expectation that controls are operating effectively, the auditor and the audit firm should perform tests of controls to obtain sufficient appropriate audit evidence that the controls were operating effectively at relevant times during the period under audit. Paragraphs 41-46 below discuss the use of audit evidence about the operating effectiveness of controls obtained in prior audits. 26. Auditors assessment of risk of material misstatement at the assertion level may include an expectation of the operating effectiveness of controls, in which case the auditor performs tests of controls to obtain audit evidence as to their operating effectiveness. Tests of the operating effectiveness of controls are performed only on those controls that the auditor has determined are suitably designed to prevent, or detect and correct, a material misstatement in an assertion.
27. When the auditor has determined that it is not possible or practicable to reduce the risks of
material misstatement at the assertion level to an acceptably low level with audit evidence obtained only from substantive procedures, the auditor should perform tests of relevant controls to obtain audit evidence about their operating effectiveness. For example, the auditor may find it impossible to design effective substantive procedures that by themselves provide sufficient appropriate audit evidence at the assertion level when an entity conducts its business using IT and no documentation of transactions is produced or maintained, other than through the IT system.
188
28. Testing the operating effectiveness of controls is different from obtaining audit evidence that controls have been implemented. When obtaining audit evidence of implementation by performing risk assessment procedures, the auditor determines that the relevant controls exist and that the entity is using them. When performing tests of the operating effectiveness of controls, the auditor obtains audit evidence that controls operate effectively during the period. This includes obtaining audit evidence about how controls were applied at relevant times during the period under audit, the consistency with which they were applied, and by whom or by what means they were applied. If substantially different controls were used at different times during the period under audit, the auditor considers each separately. The auditor may determine that testing the operating effectiveness of controls at the same time as evaluating their design and obtaining audit evidence of their implementation is efficient. 29. Although some risk assessment procedures that the auditor performs to evaluate the design of controls and to determine that they have been implemented may not have been specifically designed as tests of controls, they may nevertheless provide audit evidence about the operating effectiveness of the controls and, consequently, serve as tests of controls. For example, the auditor may have made inquiries about managements use of budgets, observed managements comparison of monthly budgeted and actual expenses, and inspected reports pertaining to the investigation of variances between budgeted and actual amounts. These audit procedures provide knowledge about the design of the entitys budgeting policies and whether they have been implemented, and may also provide audit evidence about the effectiveness of the operation of budgeting policies in preventing or detecting material misstatements in the classification of expenses. In such circumstances, the auditor considers whether the audit evidence provided by those audit procedures is sufficient. Nature of Tests of Controls 30. The auditor selects audit procedures to obtain assurance about the operating effectiveness of controls. As the planned level of assurance increases, the auditor seeks more reliable audit evidence. In circumstances when the auditor adopts an approach consisting primarily of tests of controls, in particular related to those risks where it is not possible or practicable to obtain sufficient appropriate audit evidence only from substantive procedures, the auditor ordinarily performs tests of controls to obtain a higher level of assurance about their operating effectiveness. 31. The auditor should perform other audit procedures in combination with inquiry to test the operating effectiveness of controls. Although different from obtaining an understanding of the design and implementation of controls, tests of the operating effectiveness of controls ordinarily include the same types of audit procedures used to evaluate the design and implementation of controls, and may also include reperformance of the application of the control by the auditor. Since inquiry alone is not sufficient, the auditor uses a combination of audit procedures to obtain sufficient appropriate audit evidence regarding the operating effectiveness of controls. Those controls subject to testing by performing inquiry combined with inspection or reperformance ordinarily provide more assurance than those controls for which the audit evidence consists solely of inquiry and observation. For example, an auditor may inquire about and observe the entitys procedures for opening the mail and processing cash receipts to test the operating effectiveness of controls over cash receipts. Because an observation is pertinent only at the point in time at which it is made, the auditor ordinarily supplements the observation with inquiries of entity personnel, and may also inspect documentation about the operation of such controls at other times during the audit period in order to obtain sufficient appropriate audit evidence. 32. The nature of the particular control influences the type of audit procedure required to obtain audit evidence about whether the control was operating effectively at relevant times during the period under audit. For some controls, operating effectiveness is evidenced by documentation. In such circumstances, the auditor may decide to inspect the documentation to obtain audit evidence about operating effectiveness. For other controls, however, documentation of control effectiveness may not be available or relevant. For example, documentation of operation may not exist for some factors in the control environment, such as assignment of authority and responsibility, or for some types of control activities, such as control activities performed by a computer. In such circumstances, audit evidence about operating effectiveness may be obtained through inquiry in combination with other audit procedures such as observation or the use of CAATs.
189
33. In designing tests of controls, the auditor considers the need to obtain audit evidence supporting the effective operation of controls directly related to the assertions as well as other indirect controls on which these controls depend. For example, the auditor may identify a user review of an exception report of notes receivable over a customers authorized credit limit as a direct control related to an assertion. In such cases, the auditor considers the effectiveness of the user review of the report and also the controls related to the accuracy of the information in the report. 34. In the case of an automated application control, because of the inherent consistency of IT processing, audit evidence about the implementation of the control at the time of assessment, when considered in combination with audit evidence obtained regarding the operating effectiveness of the entitys general controls may provide substantial audit evidence about its operating effectiveness during the relevant period. 35. When responding to the risk assessment, the auditor may design a test of controls to be performed concurrently with a test of details on the same transaction. The objective of tests of controls is to evaluate whether a control operated effectively. The objective of tests of details is to detect material misstatements at the assertion level. Although these objectives are different, both may be accomplished concurrently through performance of a test of controls and a test of details on the same transaction, also known as a dual-purpose test. For example, the auditor may examine an invoice to determine whether it has been approved and to provide substantive audit evidence of a transaction. The auditor carefully considers the design and evaluation of such tests to accomplish both objectives. 36. The absence of misstatements detected by a substantive procedure does not provide audit evidence that controls related to the assertion being tested are effective. However, misstatements that the auditor detects by performing substantive procedures are considered by the auditor when assessing the operating effectiveness of related controls. A material misstatement detected by the auditors procedures that was not identified by the entity ordinarily is indicative of the existence of a material weakness in internal control, which is communicated to management and those charged with governance. Timing of Tests of Controls 37. The timing of tests of controls depends on the auditors objective and determines the period of reliance on those controls. If the auditor tests controls at a particular time, the auditor only obtains audit evidence that the controls operated effectively at that time. However, if the auditor tests controls throughout a period, the auditor obtains audit evidence of the effectiveness of the operation of the controls during that period. 38. Audit evidence pertaining only to a point in time may be sufficient for the auditors purpose, for example, when testing controls over the entitys physical inventory counting at the period end. If, on the other hand, the auditor requires audit evidence of the effectiveness of a control over a period, audit evidence pertaining only to a point in time may be insufficient and the auditor supplements those tests with other tests of controls that are capable of providing audit evidence that the control operated effectively at relevant times during the period under audit. Such other tests may consist of tests of the entitys monitoring of controls.
39.
When the auditor obtains audit evidence about the operating effectiveness of controls during an interim period, the auditor should determine what additional audit evidence should be obtained for the remaining period. In making that determination, the auditor considers the significance of the assessed risks of material misstatement at the assertion level, the specific controls that were tested during the interim period, the degree to which audit evidence about the operating effectiveness of those controls was obtained, the length of the remaining period, the extent to which the auditor intends to reduce further substantive procedures based on the reliance of controls, and the control environment. The auditor obtains audit evidence about the nature and extent of any significant changes in internal control, including changes in the information system, processes, and personnel that occur subsequent to the interim period. 40. Additional audit evidence may be obtained, for example, by extending the testing of the operating effectiveness of controls over the remaining period or testing the entitys monitoring of controls.
190
41.
If the auditor plans to use audit evidence about the operating effectiveness of controls obtained in prior audits, the auditor should obtain audit evidence about whether changes in those specific controls have occurred subsequent to the prior audit. The auditor should obtain audit evidence about whether such changes have occurred by performing inquiry in combination with observation or inspection to confirm the understanding of those specific controls. VSA 500 Audit Evidence states that the auditor performs audit procedures to establish the continuing relevance of audit evidence obtained in prior periods when the auditor plans to use the audit evidence in the current period. For example, in performing the prior audit, the auditor may have determined that an automated control was functioning as intended. The auditor obtains audit evidence to determine whether changes to the automated control have been made that affect its continued effective functioning, for example, through inquiries of management and the inspection of logs to indicate what controls have been changed. Consideration of audit evidence about these changes may support either increasing or decreasing the expected audit evidence to be obtained in the current period about the operating effectiveness of the controls.
42.
If the auditor plans to rely on controls that have changed since they were last tested, the auditor should test the operating effectiveness of such controls in the current audit. Changes may affect the relevance of the audit evidence obtained in prior periods such that there may no longer be a basis for continued reliance. For example, changes in a system that enable an entity to receive a new report from the system probably do not affect the relevance of prior period audit evidence; however, a change that causes data to be accumulated or calculated differently does affect it.
43.
If the auditor plans to rely on controls that have not changed since they were last tested, the auditor should test the operating effectiveness of such controls at least once in every third audit. As indicated in paragraphs 42 and 46, the auditor may not rely on audit evidence about the operating effectiveness of controls obtained in prior audits for controls that have changed since they were last tested or controls that mitigate a significant risk. The auditors decision on whether to rely on audit evidence obtained in prior audits for other controls is a matter of professional judgment. In addition, the length of time period between retesting such controls is also a matter of professional judgment, but cannot exceed two years. 44. In considering whether it is appropriate to use audit evidence about the operating effectiveness of controls obtained in prior audits, and, if so, the length of the time period that may elapse before retesting a control, the auditor considers the following: a) The effectiveness of other elements of internal control, including the control environment, the entitys monitoring of controls, and the entitys risk assessment process. b) The risks arising from the characteristics of the control, including whether controls are manual or automated. c) The effectiveness of general IT-controls. d) The effectiveness of the control and its application by the entity, including the nature and extent of deviations in the application of the control from tests of operating effectiveness in prior audits. e) The risk of material misstatement and the extent of reliance on the control. The higher the risk of material misstatement, or the greater the reliance on controls, the shorter the time period elapsed, if any, is likely to be. Factors that ordinarily decrease the period for retesting a control, or result in not relying on audit evidence obtained in prior audits at all, include the following: control; A weak control environment; Weak monitoring of controls; A significant manual element to the relevant controls; Personnel changes that significantly affect the application of the
191
the control; and -
Changing circumstances that indicate the need for changes in Weak general IT-controls.
45.
When there are a number of controls for which the auditor determines that it is appropriate to use audit evidence obtained in prior audits, the auditor should test the operating effectiveness of some controls each audit. The purpose of this requirement is to avoid the possibility that the auditor might apply the approach of paragraph 43 to all controls on which the auditor proposes to rely, but test all those controls in a single audit period with no testing of controls in the subsequent two audit periods. In addition to providing audit evidence about the operating effectiveness of the controls being tested in the current audit, performing such tests provides collateral evidence about the continuing effectiveness of the control environment and therefore contributes to the decision about whether it is appropriate to rely on audit evidence obtained in prior audits. Therefore, when the auditor determines in accordance with paragraphs 41-44 that it is appropriate to use audit evidence obtained in prior audits for a number of controls, the auditor plans to test a sufficient portion of the controls in that population in each audit period, and at a minimum, each control is tested at least every third audit. When the auditor has determined that an assessed risk of material misstatement at the assertion level is a significant risk and the auditor plans to rely on the operating effectiveness of controls intended to mitigate that significant risk, the auditor should obtain the audit evidence about the operating effectiveness of those controls from tests of controls performed in the current period. The greater the risk of material misstatement, the more audit evidence the auditor obtains that relevant controls are operating effectively. Accordingly, although the auditor often considers information obtained in prior audits in designing tests of controls to mitigate a significant risk, the auditor does not rely on audit evidence obtained in a prior audit about the operating effectiveness of controls over such risks, but instead obtains the audit evidence about the operating effectiveness of controls over such risks in the current period. 1. The auditor designs tests of controls to obtain sufficient appropriate audit evidence that the controls operated effectively throughout the period of reliance. Matters the auditor may consider in determining the extent of the auditors tests of controls include the following: a) The frequency of the performance of the control by the entity during the period; b) The length of time during the audit period that the auditor is relying on the operating effectiveness of the control; c) The relevance and reliability of the audit evidence to be obtained in supporting that the control prevents, or detects and corrects, material misstatements at the assertion level; d) The extent to which audit evidence is obtained from tests of other controls related to the assertion; e) The extent to which the auditor plans to rely on the operating effectiveness of the control in the assessment of risk (and thereby reduce substantive procedures based on the reliance of such control); and f) The expected deviation from the control. 2. The more the auditor relies on the operating effectiveness of controls in the assessment of risk, the greater is the extent of the auditors tests of controls. In addition, as the rate of expected deviation from a control increases, the auditor increases the extent of testing of the control. However, the auditor considers whether the rate of expected deviation indicates that the control will not be sufficient to reduce the risk of material misstatement at the assertion level to that assessed by the auditor. If the rate of expected deviation is expected to be too high, the auditor may determine that tests of controls for a particular assertion may not be effective.
46.
Extent of Tests of Controls
192
ii.
Because of the inherent consistency of IT processing, the auditor may not need to increase the extent of testing of an automated control. An automated control should function consistently unless the program is changed. Once the auditor determines that an automated control is functioning as intended (which could be done at the time the control is initially implemented or at some other date), the auditor considers performing tests to determine that the control continues to function effectively. Such tests might include determining that changes to the program are not made without being subject to the appropriate program change controls.
Substantive Procedures
50.
Substantive procedures are performed in order to detect material misstatements at the assertion level, and include tests of details of classes of transactions, account balances, and disclosures and substantive analytical procedures. The auditor plans and performs substantive procedures to be responsive to the related assessment of the risk of material misstatement.
51.
Irrespective of the assessed risk of material misstatement, the auditor should design and perform substantive procedures for each material class of transactions, account balance, and disclosure. This requirement reflects the fact that the auditors assessment of risk is judgmental and may not be sufficiently precise to identify all risks of material misstatement. Further, there are inherent limitations to internal control including management override. Accordingly, while the auditor may determine that the risk of material misstatement may be reduced to an acceptably low level by performing only tests of controls for a particular assertion related to a class of transactions, account balance or disclosure (see paragraph 10), the auditor always performs substantive procedures for each material class of transactions, account balance, and disclosure.
52.
The auditors substantive procedures should include the following audit procedures related to the financial statement closing process:
a) b)
Agreeing the financial statements to the underlying accounting records; and
Examining material journal entries and other adjustments made during the course of preparing the financial statements. The nature and extent of the auditors examination of journal entries and other adjustments depends on the nature and complexity of the entitys financial reporting process and the associated risks of material misstatement.
53.
When the auditor has determined that an assessed risk of material misstatement at the assertion level is a significant risk, the auditor should perform substantive procedures that are specifically responsive to that risk. For example, if the auditor identifies that management is under pressure to meet earnings expectations, there may be a risk that management is inflating sales by improperly recognizing revenue related to sales agreements with terms that preclude revenue recognition or by invoicing sales before shipment. In these circumstances, the auditor may, for example, design external confirmations not only to confirm outstanding amounts, but also to confirm the details of the sales agreements, including date, any rights of return and delivery terms. In addition, the auditor may find it effective to supplement such external confirmations with inquiries of non-financial personnel in the entity regarding any changes in sales agreements and delivery terms. When the approach to significant risks consists only of substantive procedures, the audit procedures appropriate to address such significant risks consist of tests of details of transactions or balances, or a combination of tests of details and substantive analytical procedures. The auditor considers the guidance in paragraphs 55-64 in designing the nature, timing, and extent of substantive procedures for significant risks. In order to obtain sufficient appropriate audit evidence, the substantive procedures related to significant risks are most often designed to obtain audit evidence with high reliability.
54.
193
Nature of Substantive Procedures
55.
Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. Tests of details are ordinarily more appropriate to obtain audit evidence regarding certain assertions about account balances, including existence and valuation. In some situations, the auditor may determine that performing only substantive analytical procedures may be sufficient to reduce the risk of material misstatement to an acceptably low level. For example, the auditor may determine that performing only substantive analytical procedures is responsive to the assessed risk of material misstatement for a class of transactions where the auditors assessment of risk is supported by obtaining audit evidence from performance of tests of the operating effectiveness of controls. In other situations, the auditor may determine that only tests of details are appropriate, or that a combination of substantive analytical procedures and tests of details are most responsive to the assessed risks. The auditor designs tests of details responsive to the assessed risk with the objective of obtaining sufficient appropriate audit evidence to achieve the planned level of assurance at the assertion level. In designing substantive procedures related to the existence or occurrence assertion, the auditor selects from items contained in a financial statement amount and obtains the relevant audit evidence. On the other hand, in designing audit procedures related to the completeness assertion, the auditor selects from audit evidence indicating that an item should be included in the relevant financial statement amount and investigates whether that item is so included. For example, the auditor might inspect subsequent cash disbursements to determine whether any purchases had been omitted from accounts payable. In designing substantive analytical procedures, the auditor considers such matters as the following: a) The suitability of using substantive analytical procedures given the assertions; b) The reliability of the data, whether internal or external, from which the expectation of recorded amounts or ratios is developed; c) Whether the expectation is sufficiently precise to identify a material misstatement at the desired level of assurance; and d) acceptable. The amount of any difference in recorded amounts from expected values that is
56.
57.
The auditor considers testing the controls, if any, over the entitys preparation of information used by the auditor in applying analytical procedures. When such controls are effective, the auditor has greater confidence in the reliability of the information and, therefore, in the results of analytical procedures. Alternatively, the auditor may consider whether the information was subjected to audit testing in the current or prior period. In determining the audit procedures to apply to the information upon which the expectation for substantive analytical procedures is based, the auditor considers the guidance in VSA 500 Audit Evidence. Timing of Substantive Procedures
58.
When substantive procedures are performed at an interim date, the auditor should perform further substantive procedures or substantive procedures combined with tests of controls to cover the remaining period that provide a reasonable basis for extending the audit conclusions from the interim date to the period end. In some circumstances, substantive procedures may be performed at an interim date. This increases the risk that misstatements that may exist at the period end are not detected by the auditor. This risk increases as the remaining period is lengthened. In considering whether to perform substantive procedures at an interim date, the auditor considers such factors as the following: a) b) procedures; The control environment and other relevant controls; The availability of information at a later date that is necessary for the auditors
59.
194
c) d) e) assertions; and
The objective of the substantive procedure; The assessed risk of material misstatement; The nature of the class of transactions or account balance and related
f) The ability of the auditor to perform appropriate substantive procedures or substantive procedures combined with tests of controls to cover the remaining period in order to reduce the risk that misstatements that exist at period end are not detected. 60. Although the auditor is not required to obtain audit evidence about the operating effectiveness of controls in order to have a reasonable basis for extending audit conclusions from an interim date to the period end, the auditor considers whether performing only substantive procedures to cover the remaining period is sufficient. If the auditor concludes that substantive procedures alone would not be sufficient, tests of the operating effectiveness of relevant controls are performed or the substantive procedures are performed as of the period end. In circumstances where the auditor has identified risks of material misstatement due to fraud, the auditors response to address those risks may include changing the timing of audit procedures. For example, the auditor might conclude that substantive procedures need to be performed at or near the end of the reporting period to address an identified risk of material misstatement due to fraud (see VSA 240 Fraud and Error). Ordinarily, the auditor compares and reconciles information concerning the balance at the period end with the comparable information at the interim date to identify amounts that appear unusual, investigates any such amounts, and performs substantive analytical procedures or tests of details to test the intervening period. When the auditor plans to perform substantive analytical procedures with respect to the intervening period, the auditor considers whether the period end balances of the particular classes of transactions or account balances are reasonably predictable with respect to amount, relative significance, and composition. The auditor considers whether the entitys procedures for analyzing and adjusting such classes of transactions or account balances at interim dates and for establishing proper accounting cutoffs are appropriate. In addition, the auditor considers whether the information system relevant to financial reporting will provide information concerning the balances at the period end and the transactions in the remaining period that is sufficient to permit investigation of: significant unusual transactions or entries (including those at or near period end); other causes of significant fluctuations, or expected fluctuations that did not occur; and changes in the composition of the classes of transactions or account balances. The substantive procedures related to the remaining period depend on whether the auditor has performed tests of controls. If misstatements are detected in classes of transactions or account balances at an interim date, the auditor ordinarily modifies the related assessment of risk and the planned nature, timing, or extent of the substantive procedures covering the remaining period that relate to such classes of transactions or account balances, or extends or repeats such audit procedures at the period end. The use of audit evidence from the performance of substantive procedures in a prior audit is not sufficient to address a risk of material misstatement in the current period. In most cases, audit evidence from the performance of substantive procedures in a prior audit provides little or no audit evidence for the current period. In order for audit evidence obtained in a prior audit to be used in the current period as substantive audit evidence, the audit evidence and the related subject matter must not fundamentally change. An example of audit evidence obtained from the performance of substantive procedures in a prior period that may be relevant in the current year is a legal opinion related to the structure of a securitization to which no changes have occurred during the current period. As required by VSA 500 Audit evidence, if the auditor plans to use audit evidence obtained from the performance of substantive procedures in a prior audit, the auditor performs audit procedures during the current period to establish the continuing relevance of the audit evidence. The greater the risk of material misstatement, the greater the extent of substantive procedures. Because the risk of material misstatement takes account of internal control, the extent of
61.
62.
63.
64.
Extent of the Performance of Substantive Procedures 65.
195
substantive procedures may be increased as a result of unsatisfactory results from tests of the operating effectiveness of controls. However, increasing the extent of an audit procedure is appropriate only if the audit procedure itself is relevant to the specific risk. 66. In designing tests of details, the extent of testing is ordinarily thought of in terms of the sample size, which is affected by the risk of material misstatement. However, the auditor also considers other matters, including whether it is more effective to use other selective means of testing, such as selecting large or unusual items from a population as opposed to performing representative sampling or stratifying the population into homogeneous subpopulations for sampling. VSA 530 Audit Sampling and Other Selective Testing Procedures contains guidance on the use of sampling and other means of selecting items for testing. In designing substantive analytical procedures, the auditor considers the amount of difference from the expectation that can be accepted without further investigation. This consideration is influenced primarily by materiality and the consistency with the desired level of assurance. Determination of this amount involves considering the possibility that a combination of misstatements in the specific account balance, class of transactions, or disclosure could aggregate to an unacceptable amount. In designing substantive analytical procedures, the auditor increases the desired level of assurance as the risk of material misstatement increases. The auditor should perform audit procedures to evaluate whether the overall presentation of the financial statements, including the related disclosures, are in accordance with the applicable financial reporting framework. The auditor considers whether the individual financial statements are presented in a manner that reflects the appropriate classification and description of financial information. The presentation of financial statements in conformity with the applicable financial reporting framework also includes adequate disclosure of material matters. These matters relate to the form, arrangement, and content of the financial statements and their appended notes, including, for example, the terminology used, the amount of detail given, the classification of items in the statements, and the bases of amounts set forth. The auditor considers whether management should have disclosed a particular matter in light of the circumstances and facts of which the auditor is aware at the time. In performing the evaluation of the overall presentation of the financial statements, including the related disclosures, the auditor considers the assessed risk of material misstatement at the assertion level in accordance with VSA 500 Audit Evidence for a description of the assertions related to presentation and disclosure. Evaluating the Sufficiency and Appropriateness of Audit Evidence Obtained 68. Based on the audit procedures performed and the audit evidence obtained, the auditor should evaluate whether the assessments of the risks of material misstatement at the assertion level remain appropriate. As the auditor performs planned audit procedures, the audit evidence obtained may cause the auditor to modify the nature, timing, or extent of other planned audit procedures. Information may come to the auditors attention that differs significantly from the information on which the risk assessment was based. For example, the extent of misstatements that the auditor detects by performing substantive procedures may alter the auditors judgment about the risk assessments and may indicate a material weakness in internal control. In addition, analytical procedures performed at the overall review stage of the audit may indicate a previously unrecognized risk of material misstatement. In such circumstances, the auditor may need to reevaluate the planned audit procedures, based on the revised consideration of assessed risks for all or some of the classes of transactions, account balances, or disclosures and related assertions. The concept of effectiveness of the operation of controls recognizes that some deviations in the way controls are applied by the entity may occur. Deviations from prescribed controls may be caused by such factors as changes in key personnel, significant seasonal fluctuations in volume of transactions and human error. When such deviations are detected during the performance of tests of controls, the auditor makes specific inquiries to understand these matters and their potential consequences, for example, by inquiring about the timing of personnel changes in key internal control functions. The auditor determines whether the tests of controls performed provide an appropriate basis
Adequacy of Presentation and Disclosure
67.
69.
70.
196
for reliance on the controls, whether additional tests of controls are necessary, or whether the potential risks of misstatement need to be addressed using substantive procedures. 71. The auditor cannot assume that an instance of fraud or error is an isolated occurrence, and therefore considers how the detection of a misstatement affects the assessed risks of material misstatement. Before the conclusion of the audit, the auditor evaluates whether audit risk has been reduced to an acceptably low level and whether the nature, timing, and extent of the audit procedures may need to be reconsidered. For example, the auditor reconsiders the following: THE NATURE, TIMING, AND EXTENT OF SUBSTANTIVE PROCEDURES; AND THE AUDIT EVIDENCE OF THE OPERATING EFFECTIVENESS OF RELEVANT CONTROLS, INCLUDING THE ENTITYS RISK ASSESSMENT PROCESS.
72.
The auditor should conclude whether sufficient appropriate audit evidence has been obtained to reduce to an acceptably low level the risk of material misstatement in the financial statements. In developing an opinion, the auditor considers all relevant audit evidence, regardless of whether it appears to corroborate or to contradict the assertions in the financial statements. The sufficiency and appropriateness of audit evidence to support the auditors conclusions throughout the audit are a matter of professional judgment. The auditors judgment as to what constitutes sufficient appropriate audit evidence is influenced by such factors as the following: a) Significance of the potential misstatement in the assertion and the likelihood of its having a material effect, individually or aggregated with other potential misstatements, on the financial statements; b) c) misstatements; d) e) g) h) Effectiveness of managements responses and controls to address the risks; Experience gained during previous audits with respect to similar potential
73.
Results of audit procedures performed, including whether such audit procedures identified specific instances of fraud or error; Source and reliability of the available information; Persuasiveness of the audit evidence; and Understanding of the entity and its environment, including its internal control.
74. If the auditor has not obtained sufficient appropriate audit evidence as to a material financial statement assertion, the auditor should attempt to obtain further audit evidence. If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor should express a qualified opinion or a disclaimer of opinion to comply with VSA 700 The Auditors Report on Financial Statements. Documentation The auditor should document the overall responses to address the assessed risks of material misstatement at the financial statement level and the nature, timing, and extent of the further audit procedures, the linkage of those procedures with the assessed risks at the assertion level, and the results of the audit procedures. In addition, if the auditor plans to use audit evidence about the operating effectiveness of controls obtained in prior audits, the auditor should document the conclusions reached with regard to relying on such controls that were tested in a prior audit. The manner in which these matters are documented is based on the auditors professional judgment. VSA 230 Documentation establishes standards and provides guidance regarding documentation in the context of the audit of financial statements.
197
Standard No 505 External confirmations
STANDARD 505 EXTERNAL CONFIRMATIONS (Issued in pursuance of the Minister of Finance Decision No. 101/2005/QD-BTC dated 29 December 2005) GENERAL 2.The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide guidance on the auditors use of external confirmation as a means of obtaining audit evidence of the auditor and the audit firm. 3. The auditor and the audit firm should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence at the assertion. In making this determination, the auditor should consider the assessed risk of material misstatement, inherent and control risks and how the audit evidence from other planned audit procedures will reduce the risk of material misstatement at the asserion level to an acceptably low level. 4. The auditor and the audit firm should comply with this VSA in obtaining external confirmations. 5. It is expected that the audited (client) entity, related entities and persons should possess essential knowledge as to the objective and general principles set out in this VSA in working with the auditor and the audit firm and dealing with the relations maintained during obtaining external confirmation. 6. VSA 500 Audit Evidence states that the reliability of audit evidence is influenced by its source and by its nature, and is dependent on the individual circumstances under which it is obtained. Under this VSA, audit evidence is more reliable when it is obtained from independent sources outside the entity; and audit evidence is more reliable when it exists in image or documentary form than in oral form. Accordingly, audit evidence in the form of original written from outside is more reliable as people outside the entity are not directly related to the entity being audited. The auditor should determine whether to consider audit evidence individually or cumulatively from other audit procedures which were implemented or will be implemented to assist in reducing the risk of material misstatement for the related assertions to an acceptably low level. 7. External confirmation is the process of obtaining and evaluating audit evidence through a representation of information or an existing condition directly from a third party in response to a request for information about a particular item affecting managements assertions disclosed in the financial statements of the entity being audited. In deciding to what extent to use external confirmations the auditor and the audit firm consider the characteristics of the environment in which the entity being audited operates and the collectability of such information. 8. External confirmations are frequently used in relation to account balances and their components, but need not be restricted to these items. For example, the auditor and the audit firm may request external confirmation of the terms of agreements or transactions an entity has with third parties. Other examples of situations where external confirmations may be used include the following: a) b) c) consignment; d) security; e) sheet date; f) g) Bank balances and other information from bankers; Accounts receivable balances; Stocks held by third parties at bonded warehouses for processing or on Property title deeds held by lawyers or financiers for safe custody or as Investments purchased from stockbrokers but not delivered at the balance Loans from lenders; and Accounts payable balances.
198
9. The reliability of the audit evidence obtained by external confirmations depends, among other factors, upon the auditor applying appropriate audit procedures in designing the external confirmation request, performing the external confirmation procedures, and evaluating the results of the external confirmation procedures. Factors affecting the reliability of confirmations include the control the auditor exercises over confirmation requests and responses, the characteristics of the respondents, and any restrictions included in the response or imposed by management. CONTENTS OF THE VSA Relationship of External Confirmation Procedures to the Auditors Assessments of the Inherent Risk and Control Risk 10. VSA 400 Risk Assessments and Internal Control specifies audit risk and its components, including inherent risk, control risk and detection risk. This VSA also prescribles that the auditors control risk assessment, together with the inherent risk assessment is to influence the nature, timing and extent of substantive procedures to be performed to reduce detection risk, therefore audit risk, to an acceptably low level.
10.
VSA 400 Risk Assessments and Internal Control also specifies the nature and extent of audit evidence obtained from carrying out substantive procedures that depend on auditors assessments of control and inherent risk. The assessed levels of inherent and control risk cannot be sufficiently low to eliminate the need for the auditor to perform any substantive procedures. These substantive procedures may include external confirmation procedures for the assertion of the financial statements. 11. VSA 400 Risk Assessments and Internal Control requires that the higher the assessment of inherent and control risk, the more audit evidence the auditor should obtain from the performance of substantive procedures. Therefore, when the assessed levels of inherent and control risk increase, the auditor should perform substantive procedures to further collect appropriate audit evidence concerning an assertion of the financial statements. In the circumstances, using external confirmation procedures brings effect on adequately provision of appropriate audit evidence. 12. The lower the assessment of inherent and control risk, the less assurance the auditor should obtain from the performance of substantive procedures in order to express an opinion on an assertion of the financial statements. 13. Complex or unusual transactions can result in a higher level of inherent and control risk than that of normal ones. Where the entity being audited has unusual or complex transactions and the assessed level of its inherent and control risk is high, the auditor should check external confirmations kept by the entity concerning contents relevant to these transactions with related parties. VSA 500 Audit evidence requires that assertions of the financial statements should satisfy the creteria, including: existence, rights and obligations, occurrence, completeness, valuation, accuracy, and disclosure. While external confirmations may provide audit evidence regarding these assertions, the ability of an external confirmation to provide audit evidence relevant to a particular assertion varies. External confirmation of an account receivable provides reliable and relevant audit evidence regarding the existence of the account as at a certain date. Confirmation also provides audit evidence regarding the operation of cut-off procedures. However, such confirmation does not ordinarily provide all the necessary audit evidence relating to the valuation assertion, since it is not practicable to ask the debtor to confirm detailed information relating to its ability to pay the account. Similarly, in the case of goods held on consignment, external confirmation is likely to provide reliable and relevant audit evidence to support the existence and the rights and obligations assertions, but might not provide audit evidence that supports the valuation assertion. The relevance of external confirmations to auditing a particular assertion is also affected by the objective of the auditor in selecting information for confirmation. For example, when auditing the completeness assertion for accounts payable, the auditor and the audit firm need to obtain audit evidence that there is no material unrecorded liability. Accordingly, sending confirmation requests to an entitys principal suppliers asking them to provide copies of their statements of account directly to
Assertions Addressed by External Confirmations 14.
15.
16.
17.
199
the auditor, even if the records show no amount currently owing to them, will usually be more effective in detecting unrecorded liabilities than selecting accounts for confirmation based on the larger amounts recorded in the accounts payable subsidiary ledger. 18. When obtaining audit evidence for assertions not adequately addressed by confirmations, the auditor considers other audit procedures to complement confirmation procedures or to be used instead of confirmation procedures. DESIGN OF THE EXTERNAL CONFIRMATION REQUEST The auditor and the audit firm should tailor external confirmation requests to the specific audit objective. When designing the request, the auditor considers the assertions being addressed and the factors that are likely to affect the reliability of the confirmations. Factors such as the form of the external confirmation request, prior experience on the audit or similar engagements, the nature of the information being confirmed, and the intended respondent, affect the design of the requests because these factors have a direct effect on the reliability of the audit evidence obtained through external confirmation procedures. Also, in designing the request, the auditor and the audit firm consider the type of information respondents will be able to confirm readily since this may affect the response rate and the nature of the audit evidence obtained. For example, certain respondents information systems may facilitate the external confirmation of single transactions rather than of entire account balances. In addition, respondents may not always be able to confirm certain types of information, such as the overall accounts receivable balance, but may be able to confirm individual invoice amounts within the total balance. Confirmation requests ordinarily include managements authorization to the respondent to disclose the information to the auditor. Respondents may be more willing to respond to a confirmation request containing managements authorization, and in some cases may be unable to respond unless the request contains managements authorization.
19.
20.
21.
USE OF POSITIVE AND NEGATIVE CONFIRMATIONS 22. The auditor may use open or closed external confirmation requests or a combination of both. 23. An open (positive) external confirmation request asks the respondent to reply to the auditor in all cases either by indicating the respondents agreement with the given information, or by asking the respondent to fill in information. A response to an open confirmation request is ordinarily expected to provide reliable audit evidence. There is a risk, however, that a respondent may reply to the confirmation request without verifying that the information is correct. The auditor is not ordinarily able to detect whether this has occurred. The auditor may reduce this risk, however, by using open confirmation requests that do not state the amount (or other information) on the confirmation request, but ask the respondent to fill in the amount or furnish other information. On the other hand, use of this type of open confirmation request may result in lower response rates because additional effort is required of the respondents. 24. A closed (negative) external confirmation request asks the respondent to reply only in the event of disagreement with the information provided in the request. However, when no response has been received to a closed confirmation request, the auditor remains aware that there will be no explicit audit evidence that intended third parties have received the confirmation requests and verified that the information contained therein is correct. Accordingly, the use of closed (negative) confirmation requests ordinarily provides less reliable audit evidence than the use of open (positive) confirmation requests, and the auditor considers performing other substantive procedures to supplement the use of negative confirmations. 25. Closed (negative) confirmation requests may be used to reduce the risk of material misstatement to an acceptable level when: a) b) c) d) The assessed risk of material misstatement is lower; A large number of small balances is involved; A substantial number of errors is not expected; and The auditor has no reason to believe that respondents will disregard these
200
requests. 26. A combination of positive and negative external confirmations may be used. For example, where the total accounts receivable balance comprises a small number of large balances and a large number of small balances, the auditor may decide that it is appropriate to confirm all or a sample of the large balances with positive confirmation requests and a sample of the small balances using negative confirmation requests. When the auditor seeks to confirm certain balances or other information, and management requests the auditor not to do so, the auditor and the audit firm should consider whether there are valid grounds for such a request and obtain audit evidence to support the validity of managements requests. If the auditor agrees to managements request not to seek external confirmation regarding a particular matter, the auditor and the audit firm should apply alternative audit procedures to obtain sufficient appropriate audit evidence regarding that matter. If the auditor and the audit firm do not accept the validity of managements request and is prevented from carrying out the confirmations, there has been a limitation on the scope of the auditors work and the auditor and the audit firm should consider the possible impact on the auditors report. When considering the reasons provided by management, the auditor and the audif firm apply an attitude of professional skepticism and consider whether the request has any implications regarding managements integrity. The auditor considers whether managements request may indicate the possible existence of fraud or error. If the auditor believes that fraud or error exists, the auditor applies the guidance in VSA 240 Fraud and Error. The auditor also considers whether the alternative audit procedures will provide sufficient appropriate audit evidence regarding that matter. The reliability of audit evidence provided by a confirmation is affected by the respondents competence, independence, authority to respond, knowledge of the matter being confirmed, and objectivity. For this reason, the auditor and the audit firm attempt to ensure, where practicable, that the confirmation request is directed to an appropriate individual. For example, when confirming that a covenant related to an entitys long-term debt has been waived, the auditor directs the request to an official of the creditor who has knowledge about the waiver and has the authority to provide the information. The auditor and the audit firm also assess whether certain parties may not provide an objective or unbiased response to a confirmation request. Information about the respondents competence, knowledge, motivation, ability or willingness to respond may come to the auditors attention. The auditor considers the effect of such information on designing the confirmation request and evaluating the results, including determining whether additional audit procedures are necessary. The auditor also considers whether there is sufficient basis for concluding that the confirmation request is being sent to a respondent from whom the auditor can expect a response that will provide sufficient appropriate audit evidence. For example, the auditor may encounter significant unusual year-end transactions that have a material effect on the financial statements, the transactions being with a third party that is economically dependent upon the entity. In such circumstances, the auditor and the audit firm consider whether the third party may be motivated to provide an inaccurate response. When performing confirmation procedures, the auditor and the audit firm should maintain control over the process of selecting those to whom a request will be sent, the preparation and sending of confirmation requests, and the responses to those requests. Control is maintained over communications between the intended recipients and the auditor to minimize the possibility that the results of the confirmation process will be biased because of the interception and alteration of confirmation requests or responses. The auditor ensures that it is the auditor who sends out the confirmation requests, that the requests are properly addressed, and that it is requested that all replies are sent directly to the auditor. The auditor considers whether replies have come from the purported
Management Requests 27.
28.
29.
Characteristics of Respondents 30.
31.
The External Confirmation Process
32.
201
senders. No Response to a Positive Confirmation Request 26. The auditor and the audit firm should perform alternative audit procedures where no response is received to a positive external confirmation request. The alternative audit procedures should be such as to provide audit evidence about the assertions that the confirmation request was intended to provide. Where no response is received, the auditor and the audit firm ordinarily contact the recipient of the request to elicit a response. Where the auditor and the audit firm are unable to obtain a response, the auditor uses alternative audit procedures. The nature of alternative audit procedures varies according to the account and assertion in question. In the examination of accounts receivable, alternative audit procedures may include examination of subsequent cash receipts, examination of shipping documentation or other client documentation to provide audit evidence for the existence assertion, and examination of sales near the period-end to provide audit evidence for the cutoff assertion. In the examination of accounts payable, alternative audit procedures may include examination of subsequent cash disbursements or correspondence from third parties to provide audit evidence of the existence assertion, and examination of other records, such as goods received notes, to provide audit evidence of the completeness assertion. The auditor and the audit firm consider whether there is any indication that external confirmations received may not be reliable. The auditor considers the responses authenticity and performs audit procedures to dispel any concern. The auditor may choose to verify the source and contents of a response in a telephone call to the purported sender. In addition, the auditor requests the purported sender to mail the original confirmation directly to the auditor. With ever-increasing use of technology, the auditor considers validating the source of replies received in electronic format (for example, fax or electronic mail). Oral confirmations are documented in the work papers. If the information in the oral confirmations is significant, the auditor requests the parties involved to submit written confirmation of the specific information directly to the auditor. When the auditor and the audit firm form a conclusion that the confirmation process and alternative audit procedures have not provided sufficient appropriate audit evidence regarding an assertion, the auditor should perform additional audit procedures to obtain sufficient appropriate audit evidence. In forming the conclusion, the auditor considers the: a) b) c) Reliability of the confirmations and alternative audit procedures; Nature of any exceptions, including the implications, both quantitative and qualitative of those exceptions; and Audit evidence provided by other audit procedures. Based on this evaluation, the auditor determines whether additional audit procedures are needed to obtain sufficient appropriate audit evidence. 30. The auditor also considers the causes and frequency of exceptions reported by respondents. An exception may indicate a misstatement in the entitys records, in which case, the auditor determines the reasons for the misstatement and assesses whether it has a material effect on the financial statements. If an exception indicates a misstatement, the auditor reconsiders the nature, timing and extent of audit procedures necessary to provide the audit evidence required. Evaluating the Results of the Confirmation Process
27.
Reliability of Responses Received 28.
Causes and Frequency of Exceptions 29.
31.
The auditor should evaluate whether the results of the external confirmation process together with the results from any other audit procedures performed, provide sufficient appropriate audit evidence regarding the assertion being audited. In conducting this evaluation the auditor and the audit firm consider the guidance provided by VSA 530 Audit Sampling and Other Means of Testing.
202
External Confirmations Prior to the Year-End When the auditor uses confirmation as at a date prior to the year-end to obtain audit evidence to support an assertion, the auditor obtains sufficient appropriate audit evidence that transactions relevant to the assertion in the intervening period have not been materially misstated. In fact, when inherent and control risks are low and medium, the auditor may decide to confirm balances at a date other than the period end, for example, when the audit is to be completed within a short time after the balance sheet date. As with all types of pre-year-end work, the auditor considers the need to obtain further audit evidence relating to the remainder of the period
203
Standard No 545- Auditing fair values measurements and disclosures
STANDARD 545 AUDITING FAIR VALUES MEASUREMENTS AND DISCLOSURES GENERAL 1. The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide guidance on auditing fair value measurements and disclosures contained in financial statements. This VSA assists the auditor and the audit firm with addressing audit considerations relating to the measurement, presentation and disclosure of material assets, liabilities and specific components of equity presented or disclosed at fair value in financial statements. Fair value measurements of assets, liabilities and components of equity may arise from both the initial recording of transactions and later changes in value. Changes in fair value measurements that occur over time may be treated in different ways under the regulations of the applicable accounting systems and standards.
2. The auditor and the audit firm should obtain sufficient appropriate audit evidence that fair
value measurements and disclosures are in accordance with the regulations of the applicable accounting systems and standards. 3. This VAS applies to audits of financial statements and also applies to audits of other financial information, and related services rendered by the audit firm. The auditor and the audit firm should comply with this VSA in conducting an audit of financial statements and rendering related services. It is expected that the audited (client) entity and users of the audit report should possess essential knowledge as to the objective and general principles set out in this VSA in fulfilling its responsibility and in working with the auditor and the audit firm to deal with relations mainttained during the audit. 4. Management is responsible for making the fair value measurements and disclosures included in the financial statements. As part of fulfilling its responsibility, management needs to establish an accounting and financial reporting process for determining the fair value measurements and disclosures, select appropriate valuation methods, identify and adequately support any significant assumptions used, prepare the valuation and ensure that the presentation and disclosure of the fair value measurements are in accordance with the accounting system and standards which the entity applies. 5. Many measurements based on estimates, including fair value measurements, are inherently imprecise. In the case of fair value measurements, particularly those that do not involve contractual cash flows or for which market information is not available when making the estimate, fair value estimates often involve uncertainty in both the amount and timing of future cash flows. Fair value measurements also may be based on assumptions about future conditions, transactions or events whose outcome is uncertain and will therefore be subject to change over time. The auditors consideration of such assumptions is based on information available to the auditor at the time of the audit and the auditor is not responsible for predicting future conditions, transactions or events which, had they been known at the time of the audit, may have had a significant effect on managements actions or managements assumptions underlying the fair value measurements and disclosures. Assumptions used in fair value measurements are similar in nature to those required when developing other accounting estimates. VSA 540 Audit of Accounting Estimates provides guidance on auditing accounting estimates. This VSA also addresses considerations similar to those in VSA 540 and provides for others in the specific context of fair value measurements and disclosures in accordance with an applicable accounting system and standards. Different accounting systems and standards require or permit a variety of fair value measurements and disclosures in financial statements. They also vary in the level of guidance that they provide on the basis for measuring assets and liabilities or the related disclosures. Some accounting systems and standards give prescriptive guidance, others give general guidance, and some give no guidance at all. In addition, certain industry-specific measurement and disclosure practices for fair values also exist. While this VSA provides guidance on auditing fair value measurements and disclosures, it does not address specific types of assets or liabilities, transactions, or industry-specific practices.
6.
204
7.
In VAS Frameworks, underlying the concept of fair value measurements is a presumption that the entity is a going concern in a foreseeable future, that is, it has no intention or obligation to liquidate, curtail materially the scale of its operations, or undertake a transaction on adverse terms. Therefore, in this case, fair value would not be the amount that an entity would receive or pay in a forced transaction, involuntary liquidation, or distress sale. An entity, however, may need to take its current economic or operating situation into account in determining the fair values of its assets and liabilities if prescribed or permitted to do so by applicable accounting systems or standards and such accounting framework may or may not specify how that is done. For example, managements plan to dispose of an asset on an accelerated basis to meet specific business objectives may be relevant to the determination of the fair value of that asset. The measurement of fair value may be relatively simple for certain assets or liabilities, for example, assets that are bought and sold in active and open markets that provide readily available and reliable information on the prices at which actual exchanges occur. The measurement of fair value for other assets or liabilities may be more complex. A specific asset may not have an active market or may possess characteristics that make it necessary for management to estimate its fair value (for example, an investment property or a derivative financial instrument). The estimation of fair value may be achieved through the use of a valuation model (for example, discounting of future cash flows) or through the assistance of an expert, such as an independent valuer. The uncertainty associated with an item, or the lack of objective data may make it incapable of reasonable estimation, in which case, the auditor considers whether the auditors report needs modification to comply with VSA 700 The Auditors Report on Financial Statements. CONTENTS OF THE VSA Understanding the Entitys Process for Determining Fair Value Measurements and Disclosures and Relevant Control Activities, and Assessing Risk
8.
9.
10.
The auditor and the audit firm should obtain an understanding of the entitys process for determining fair value measurements and disclosures and of the relevant control activities to identify and assess assertion-level risk to design and perform further audit procedures. Management is responsible for establishing an accounting and financial reporting process for determining fair value measurements. In some cases, the measurement of fair value and therefore the process set up by management to determine fair value may be simple and reliable. For example, management may be able to refer to published price quotations to determine fair value for marketable securities held by the entity. Some fair value measurements, however, are inherently more complex than others and involve uncertainty about the occurrence of future events or their outcome, and therefore assumptions that may involve the use of judgment need to be made as part of the measurement process. The auditors understanding of the measurement process, including its complexity, helps identify and assess the risks of material misstatement in order to determine the nature, timing and extent of the audit procedures. When obtaining an understanding of the entity's process for determining fair value measurements and disclosures, the auditor considers, for example: a) The relevant control activities over the process used to determine fair value measurements, including, for example, controls over data and the segregation of duties between those committing the entity to the underlying transactions and those responsible for undertaking the valuations; b) The expertise and experience of those persons determining the fair value measurements; c) The role that information technology has in the process;
11.
12.
d) The types of accounts or transactions requiring fair value measurements or disclosures (for
example, whether the accounts arise from the recording of routine and recurring transactions or whether they arise from non-routine or unusual transactions);
e) The extent to which the entity uses service organizations to provide fair value measurements or
the data that supports the measurement. When an entity uses a service organization, the auditor
205
complies with the requirements of VSA 402 Audit Considerations Relating to Entities Using Service Organizations; f) The extent to which the entity uses the work of experts in determining fair value measurements and disclosures (see paragraphs 2932 of this VSA); g) The significant management assumptions used by management in determining fair value; h) The documentation supporting managements assumptions; i) j) The methods used to develop and apply management assumptions and controls to monitor changes in those assumptions; The integrity of change controls and security procedures for valuation models and relevant information systems, including approval processes; and
k) The controls over the consistency, timeliness and reliability of the data used in valuation models. 13. VSA 400 requires the auditor to obtain an understanding of the components of the accounting and internal control systems to plan the audit. It is required in particular by this VSA the auditor and the audit firm obtain a sufficient understanding of the entitys fair value measurements and disclosures in order to design the nature, timing and extent of the further audit procedures. After obtaining an understanding of the entitys process for determining fair value measurements and disclosures, the auditor and the audit firm should identify and assess the significant assertion-level risks related to the fair value measurements and disclosures in the financial statements to determine the nature, timing and extent of the further audit procedures. The degree to which a fair value measurement is susceptible to misstatement is an inherent risk. Consequently, the nature, timing and extent of the further audit procedures will depend upon the susceptibility to misstatement of a fair value measurement and whether the process for determining fair value measurements is relatively simple or complex. Where the auditor has determined that the risk of material misstatement related to a fair value measurement or disclosure is a significant risk, the auditor follows the requirements of VSA 400 Risk Assessments and Internal Control. VSA 400 discusses the inherent limitations of internal controls. As fair value determinations often involve subjective judgments by management, this may affect the nature of control activities that are capable of being implemented. The susceptibility to misstatement of fair value measurements also may increase as the accounting and financial reporting requirements for fair value measurements become more complex. The auditor considers the inherent limitations of controls in such circumstances in assessing the risk of material misstatement. The auditor and the audit firm should evaluate whether the fair value measurements and disclosures in the financial statements are in accordance with the accounting system and standards which the entity applies. The auditors understanding of the requirements of the applicable accounting system and standards and knowledge of the business and industry, together with the results of other audit procedures, are used to assess whether the accounting for assets or liabilities requiring fair value measurements is appropriate, and whether the disclosures about the fair value measurements and significant uncertainties related thereto are appropriate under the accounting system and standards. The evaluation of the appropriateness of the entitys fair value measurements under the applicable accounting system and standards and the evaluation of audit evidence depends, in part, on the auditors knowledge of the nature of the business. This is particularly true where the asset or liability or the valuation method is highly complex. For example, derivative financial instruments may be highly complex, with a risk that differing interpretations of how to determine fair values will result in different conclusions. The measurement of the fair value of some items, for example in-process research and development or intangible assets acquired in a business combination, may involve special considerations that are affected by the nature of the entity and its operations if such considerations are appropriate under the accounting system and standards which the entity applies. Also, the auditors knowledge of the business, together with the results of other audit procedures, may
14.
15.
16.
Evaluating the Appropriateness of Fair Value Measurements and Disclosures 17.
18.
19.
206
help identify assets for which management needs to recognize impairment by using a fair value measurement pursuant to the accounting system and standards.
20.
Where the method for measuring fair value is specified by the applicable accounting system and standards, for example, the requirement that the fair value of a marketable security be measured using quoted market prices as opposed to using a valuation model, the auditor considers whether the measurement of fair value is consistent with that method. Some accounting standards presume that fair value can be measured reliably for assets or liabilities as a prerequisite to either requiring or permitting fair value measurements or disclosures. In some cases, this presumption may be overcome when an asset or liability does not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are clearly inappropriate or unworkable. When management has determined that it has overcome the presumption that fair value can be reliably determined, the auditor obtains sufficient appropriate audit evidence to support such determination, and whether the item is properly accounted for under the applicable accounting system and standards. The auditor should obtain audit evidence about managements intent to carry out specific courses of action, and consider its ability to do so, where relevant to the fair value measurements and disclosures under the applicable accounting system and standards. In some accounting systems and standards, managements intentions with respect to an asset or liability are criteria for determining measurement, presentation, and disclosure requirements, and how changes in fair values are reported within financial statements. In such accounting frameworks, managements intent is important in determining the appropriateness of the entitys use of fair value. Management often documents plans and intentions relevant to specific assets or liabilities and the applicable accounting system and standards may require it to do so. While the extent of audit evidence to be obtained about managements intent is a matter of professional judgment, the auditors procedures ordinarily include inquiries of management, with appropriate corroboration of responses, for example, by: a) Considering managements past history of carrying out its stated intentions with respect to assets or liabilities; b) Reviewing written plans and other documentation, including, where applicable, budgets, minutes, etc; c) action; Considering managements stated reasons for choosing a particular course of
21.
22.
23.
d)
Considering managements ability to carry out a particular course of action given the entitys economic circumstances, including the implications of its contractual commitments. The auditor also considers managements ability to pursue a specific course of action if ability is relevant to the use, or exemption from the use, of fair value measurement under the applicable accounting system and standards.
24.
Where alternative methods for measuring fair value are available under the accounting system and standards which the entity applies, or where the method of measurement is not prescribed, the auditor and the audit firm should evaluate whether the method of measurement is appropriate in the circumstances under the applicable accounting system and standards. The auditor should evaluate whether the method of measurement of fair value is appropriate in the circumstances require the use of professional judgment. When management selects one particular valuation method from alternative methods available under the accounting system and standards which the entity applies, the auditor obtains an understanding of managements rationale for its selection by discussing with management its reasons for selecting the valuation method. The auditor considers whether:
25.
a)
Management has sufficiently evaluated and appropriately applied the criteria, if any, provided in the applicable accounting system and standards to support the selected method;
207
b)
The valuation method is appropriate in the circumstances given the nature of the asset or liability being valued and the accounting system and standards which the entity applies; and c) The valuation method is appropriate in relation to the business, industry and environment in which the entity operates. 26. Management may have determined that different valuation methods result in a range of significantly different fair value measurements. In such cases, the auditor evaluates how the entity has investigated the reasons for these differences in establishing its fair value measurements. The auditor and the audit firm should evaluate whether the entitys method for its fair value measurements is applied consistently. Once management has selected a specific valuation method, the auditor evaluates whether the entity has consistently applied that basis in its fair value measurement, and if so, whether the consistency is appropriate considering possible changes in the environment or circumstances affecting the entity, or changes in the requirements of the accounting system and standards which the entity applies. If management has changed the valuation method, the auditor considers whether management can adequately demonstrate that the valuation method to which it has changed provides a more appropriate basis of measurement, or whether the change is supported by a change in the requirements of the applicable accounting system and standards or a change in circumstances. For example, the introduction of an active market for a particular class of asset or liability may indicate that the use of discounted cash flows to estimate the fair value of such asset or liability is no longer appropriate. The auditor and the audit firm should determine the need to use the work of an expert. The auditor may have the necessary skill and knowledge to plan and perform audit procedures related to fair values or may decide to use the work of an expert. In making such a determination, the auditor considers the matters discussed in VSA 620 Using the Work of an Expert. If the use of such an expert is planned, the auditor obtains sufficient appropriate audit evidence that such work is adequate for the purposes of the audit, and complies with the requirements of VSA 620. When planning to use the work of an expert, the auditor considers whether the experts understanding of the definition of fair value and the method that the expert will use to determine fair value are consistent with that of management and the requirements of the applicable accounting system and standards. For example, the method used by an expert for estimating the fair value of real estate or a complex derivative, or the actuarial methodologies developed for making fair value estimates of insurance obligations, reinsurance receivables and similar items, may not be consistent with the measurement principles of the applicable accounting system and standards. Accordingly, the auditor considers such matters, often by discussing, providing or reviewing instructions given to the expert or when reading the report of the expert. In accordance with VSA 620, the auditor and the audit firm assesses the appropriateness of the experts work as audit evidence. While the reasonableness of assumptions and the appropriateness of the methods used and their application are the responsibility of the expert, the auditor obtains an understanding of the significant assumptions and methods used, and considers whether they are appropriate, complete and reasonable, based on the auditors knowledge of the business and the results of other audit procedures. The auditor often considers these matters by discussing them with the expert. Paragraphs 39 through 49 discuss the auditors evaluation of significant assumptions used by management, including assumptions relied upon by management based on the work of an expert.
27.
28.
Using the Work of an Expert
29.
30.
31.
32.
Audit Procedures Responsive to the Risk of Material Misstatement of the Entitys Fair Value Measurements and Disclosures
33.
The auditor and the audit firm should design and perform further audit procedures in response to assessed risks of material misstatement of assertions relating to the entitys fair value measurements and disclosures.
208
34.
Because of the wide range of possible fair value measurements, from relatively simple to complex, the auditors procedures can vary significantly in nature, timing and extent. For example, substantive procedures relating to the fair value measurements may involve (a) testing managements significant assumptions, the valuation model, and the underlying data (see paragraphs 3949), (b) developing independent fair value estimates to corroborate the appropriateness of the fair value measurement (see paragraph 52), or (c) considering the effect of subsequent events on the fair value measurement and disclosures (see paragraphs 5355). The existence of published price quotations in an active market ordinarily is the best audit evidence of fair value. Some fair value measurements, however, are inherently more complex than others. This complexity arises either because of the nature of the item being measured at fair value or because of the valuation method required by the applicable accounting system and standards or selected by management. For example, in the absence of quoted prices in an active market, some accounting standards permit an estimate of fair value based on an alternative basis such as a discounted cash flow analysis or a comparative transaction model. Complex fair value measurements normally are characterized by greater uncertainty regarding the reliability of the measurement process. This greater uncertainty may be a result of: process; Length of the forecast period; The number of significant and complex assumptions associated with the
35.
A higher degree of subjectivity associated with the assumptions and factors used in the process; A higher degree of uncertainty associated with the future occurrence or outcome of events underlying the assumptions used; and 36. Lack of objective data when highly subjective factors are used. The auditors understanding of the measurement process, including its complexity, helps guide the auditors determination of the nature, timing and extent of audit procedures to be performed. The following are examples of considerations in the development of audit procedures:
a)
Using a price quotation to obtain audit evidence about valuation may require an understanding of the circumstances in which the quotation was developed. For example, where quoted securities are held for investment purposes, valuation at the listed market price may require adjustment under the accounting system and standards which the entity applies if the holding is significantly large in size or is subject to restrictions in marketability. b) When using audit evidence provided by a third party, the auditor considers its reliability. For example, when information is obtained through the use of external confirmations, the auditor considers the respondents competence, independence, authority to respond, knowledge of the matter being confirmed, and objectivity in order to be satisfied with the reliability of the evidence.
c)
Audit evidence supporting fair value measurements, for example, a valuation by an independent valuer, may be obtained at a date that does not coincide with the date at which the entity is required to measure and report that information in its financial statements. In such cases, the auditor obtains audit evidence that management has taken into account the effect of events, transactions and changes in circumstances occurring between the date of fair value measurement and the reporting date.
d)
Collateral often is assigned for certain types of investments in debt instruments that either are required to be measured at fair value or are evaluated for possible impairment. If the collateral is an important factor in measuring the fair value of the investment or evaluating its carrying amount, the auditor obtains sufficient appropriate audit evidence regarding the existence, value, rights and access to or transferability of such collateral, including consideration whether all appropriate liens have been filed, and considers whether appropriate disclosures about the collateral have been made under the accounting system and standards which the entity applies.
209
e) In some situations, additional audit procedures, such as the inspection of an asset by the auditor, may be necessary to obtain sufficient appropriate audit evidence about the appropriateness of a fair value measurement. For example, inspection of an investment property may be necessary to obtain information about the current physical condition of the asset relevant to its fair value, or inspection of a security may reveal a restriction on its marketability that may affect its value. Testing Managements Significant Assumptions, the Valuation Model, and the Underlying Data 37. The auditor and the audit firms understanding of the reliability of the process used by management to determine fair value is an important element in support of the resulting amounts and therefore affects the nature, timing, and extent of further audit procedures. A reliable process for determining fair value is one that results in reasonably consistent measurement and, where relevant, presentation and disclosure of fair value when used in similar circumstances. When obtaining audit evidence about the entitys fair value measurements and disclosures, the auditor and the audit firm evaluate whether: a. b. and c. 38. Management used relevant information that was reasonably available at the time. Estimation techniques and assumptions and the auditors consideration and comparison of fair value measurements determined in prior periods, if any, to results obtained in the current period may provide audit evidence of the reliability of managements processes. However, the auditor and the audit firm also consider whether such variances result from changes in economic circumstances. Where the auditor and the audit firm determine there is a significant risk related to fair values, or where otherwise applicable, the auditor should evaluate whether the significant assumptions used by management in measuring fair values, taken individually and as a whole, provide a reasonable basis for the fair value measurements and disclosures in the entitys financial statements. It is necessary for management to make assumptions, including assumptions relied upon by management based upon the work of an expert, to develop fair value measurements. Assumptions are integral components of more complex valuation methods, for example valuation methods that employ a combination of estimates of expected future cash flows together with estimates of the values of assets or liabilities in the future, discounted to the present. The auditor and the audit firm pay particular attention to the significant assumptions underlying a valuation method and evaluate whether such assumptions are reasonable. To provide a reasonable basis for the fair value measurements and disclosures, assumptions need to be relevant, reliable, neutral, understandable and complete. Specific assumptions will vary with the characteristics of the asset or liability being valued and the valuation method used (for example, replacement cost, direct comparison or income-based approach). For example, where discounted cash flows (an income-based approach) are used as the valuation method, there will be assumptions about the level of cash flows, the period of time used in the analysis, and the discount rate. Assumptions ordinarily are supported by differing types of audit evidence from internal and external sources that provide objective support for the assumptions used. The auditor and the audit firm assess the source and reliability of audit evidence supporting managements assumptions, including consideration of the assumptions in light of historical information and an evaluation of whether they are based on plans that are within the entitys capacity. Audit procedures dealing with managements assumptions are performed in the context of the audit of the entitys financial statements. The objective of the audit procedures is therefore not intended to obtain sufficient appropriate audit evidence to provide an opinion on the assumptions themselves. Rather, the auditor and the audit firm perform audit procedures to consider whether the assumptions provide a reasonable basis in measuring fair values in the context of an audit of the financial statements taken as a whole. Identifying those assumptions that appear to be significant to the fair value measurement requires The assumptions used by management are reasonable; The fair value measurement was determined using an appropriate model, if applicable;
39.
40.
41.
42.
43.
44.
210
the exercise of judgment by management. The auditor and the audit firm focus attention on significant assumptions. Generally, significant assumptions cover matters that materially affect the fair value measurement and may include those that are: a. Sensitive to variation or uncertainty in amount or nature. For example, assumptions about short-term interest rates may be less susceptible to significant variation compared to assumptions about long-term interest rates; and Susceptible to misapplication or bias.
b.
45.
The auditor and the audit firm consider the sensitivity of the valuation to changes in significant assumptions, including market conditions that may affect the value. Where applicable, the auditor and the audit firm encourage management to use such techniques as sensitivity analysis to help identify particularly sensitive assumptions. In the absence of such management analysis, the auditor considers whether to employ such techniques. The auditor and the audit firm also consider whether the uncertainty associated with a fair value measurement, or the lack of objective data may make it incapable of reasonable estimation under the accounting system and standards the entity applies. The consideration of whether the assumptions provide a reasonable basis for the fair value measurements relates to the whole set of assumptions as well as to each assumption individually. Assumptions are frequently interdependent, and therefore, need to be internally consistent. A particular assumption that may appear reasonable when taken in isolation may not be reasonable when used in conjunction with other assumptions. The auditor and the audit firm consider whether management has identified the significant assumptions and factors influencing the measurement of fair value. The assumptions on which the fair value measurements are based (for example, the discount rate used in calculating the present value of future cash flows) ordinarily will reflect what management expects will be the outcome of specific objectives and strategies. To be reasonable, such assumptions, individually and taken as a whole, also need to be realistic and consistent with: a. b. c. d. e. The general economic environment and the entitys economic circumstances; The plans of the entity; Assumptions made in prior periods, if appropriate; Past experience of, or previous conditions experienced by, the entity to the extent currently applicable; Other matters relating to the financial statements, for example, assumptions used by management in accounting estimates for financial statement accounts other than those relating to fair value measurements and disclosures; and If applicable, the risk associated with cash flows, including the potential variability of the cash flows and the related effect on the discounted rate.
46.
47.
f.
Where assumptions are reflective of managements intent and ability to carry out specific courses of action, the auditor and the audit firm consider whether they are consistent with the entitys plans and past experience (see paragraphs 22 and 23). 48. If management relies on historical financial information in the development of assumptions, the auditor and the audit firm considers the completeness and appropriateness of such information. However, historical information might not be representative of future conditions or events, for example, if management intends to engage in new activities or circumstances change. For items valued by the entity using a valuation model, the auditor and the audit firm are not expected to substitute their judgment for that of the entitys management. Rather, the auditor and the audit firm review the model, and evaluate whether the model is appropriate and the assumptions used are reasonable. For example, it may be inappropriate to use a discounted cash flow method in valuing an equity investment in a start-up enterprise if there are no current revenues on which to base the forecast of future earnings or cash flows. The auditor and the audit firm should perform audit procedures on the data used to develop the fair value measurements and disclosures and evaluate whether the fair value measurements have been properly determined from such data and managements assumptions.
49.
50.
211
51.
The auditor and the audit firm evaluate whether the data on which the fair value measurements are based, including the data used in the work of an expert, are accurate, complete and relevant; and whether the fair value measurements have been properly determined using such data and managements assumptions. Examples may include audit procedures such as verifying the source of the data, mathematical recalculation and reviewing of information for internal consistency, including whether such information is consistent with managements intent to carry out specific courses of action discussed in paragraphs 22 and 23. The auditor and the audit firm may make an independent estimate of fair value (for example, by using an auditor-developed model) to corroborate the entitys fair value measurement. When developing an independent estimate using managements assumptions, the auditor and the audit firm evaluate those assumptions as discussed in paragraphs 39-49. Instead of using managements assumptions the auditor and the audit firm may develop separate assumptions to make a comparison with managements fair value measurements. In that situation, the auditor and the audit firm nevertheless understand managements assumptions. The auditor and the audit firm use that understanding to determine that the auditors model considers the significant variables and to evaluate any significant difference from managements estimate. The auditor and the audit firm also perform audit procedures on the data used to develop the fair value measurements and disclosures as discussed in paragraphs 50 and 51. The auditor and the audit firm consider the guidance contained in VSA 520 Analytical Procedures when performing these procedures during an audit. The auditor and the audit firm should consider the effect of subsequent events on the fair value measurements and disclosures in the financial statements. Transactions and events that occur after period-end but prior to completion of the audit, may provide appropriate audit evidence regarding the fair value measurements made by management. For example, a sale of investment property shortly after the period-end may provide audit evidence relating to the fair value measurement. In the period after a financial statement period-end, however, circumstances may change from those existing at the period-end. Fair value information after the period -end may reflect events occurring after the period-end and not the circumstances existing at the balance sheet date. For example, the prices of actively traded marketable securities that change after the period-end ordinarily do not constitute appropriate audit evidence of the values of the securities that existed at the periodend. The auditor complies with VSA 560 Subsequent Events when evaluating audit evidence relating to such events. The auditor and the audit firm should evaluate whether the disclosures about fair values made by the entity are in accordance with the applicable accounting system and standards. Disclosure of fair value information is an important aspect of financial statements in many accounting standards. Often, fair value disclosure is required because of the relevance to users in the evaluation of an entitys performance and financial position. In addition to the fair value information required by the applicable accounting system and standards, some entities disclose voluntary additional fair value information in the notes to the financial statements. When auditing fair value measurements and related disclosures included in the notes to the financial statements, whether required by the applicable accounting system and standards or disclosed voluntarily, the auditor and the audit firm ordinarily perform essentially the same types of audit procedures as those employed in auditing a fair value measurement recognized in the financial statements. The auditor and the audit firm obtain sufficient appropriate audit evidence that the valuation principles are appropriate under the accounting system and standards which the entity applies, are being consistently applied, and the method of estimation and significant assumptions used are properly disclosed in accordance with the applicable accounting system and standards. The auditor and the audit firm also consider whether voluntary information may be inappropriate in the context of
Developing Independent Fair Value Estimates for Corroborative Purposes 52.
Subsequent Events 53. 54.
55.
Disclosures about Fair Values
56. 57.
58.
212
the financial statements. For example, management may disclose a current sales value for an asset without mentioning that significant restrictions under contractual arrangements preclude the sale in the immediate future.
59.
The auditor and the audit firm evaluate whether the entity has made appropriate disclosures about fair value information as called for by its accounting system. If an item contains a high degree of measurement uncertainty, the auditor assesses whet--her the disclosures are sufficient to inform users of such uncertainty. For example, the auditor might evaluate whether disclosures about a range of amounts, and the assumptions used in determining the range, within which the fair value is reasonably believed to lie is appropriate under the accounting system and standards which the entity applies, when management considers a single amount presentation not appropriate. Where applicable, the auditor and the audit firm also consider whether the entity has complied with the accounting and disclosure requirements relating to changes in the valuation method used to determine fair value measurements. When disclosure of fair value information under the applicable accounting system and standards is omitted because it is not practicable to determine fair value with sufficient reliability, the auditor evaluates the adequacy of disclosures required in these circumstances. If the entity has not appropriately disclosed fair value information required by the applicable accounting system and standards, the auditor evaluates whether the financial statements are materially misstated by the departure from the applicable accounting system and standards. In making a final assessment of whether the fair value measurements and disclosures in the financial statements are in accordance with the accounting system and standards which the entity applies, the auditor and the audit firm should evaluate the sufficiency and appropriateness of the audit evidence obtained as well as the consistency of that evidence with other audit evidence obtained and evaluated during the audit. When assessing whether the fair value measurements and disclosures in the financial statements are in accordance with the applicable accounting system and standards, the auditor and the audit firm evaluate the consistency of the information and audit evidence obtained during the audit of fair value measurements with other audit evidence obtained during the audit, in the context of the financial statements taken as a whole. For example, the auditor and the audit firm consider whether there is or should be a relationship or correlation between the interest rates used to discount estimated future cash flows in determining the fair value of an investment property and interest rates on borrowings currently being incurred by the entity to acquire investment property. The auditor and the audit firm should obtain written representations from management regarding the reasonableness of significant assumptions, including whether they appropriately reflect managements intent and ability to carry out specific courses of action on behalf of the entity where relevant to the fair value measurements or disclosures. VSA 580 Management Representations discusses the use of management representations as audit evidence. Depending on the nature, materiality and complexity of fair values, management representations about fair value measurements and disclosures contained in the financial statements also may include representations about the following: a) The appropriateness of the measurement methods, including related assumptions, used by management in determining fair values within the applicable framework, and the consistency in application of the methods;
60.
Evaluating the Results of Audit Procedures
61.
62.
Management Representations 63.
64.
b) c)
The basis used by management to overcome the presumption relating to the use of fair value set forth under the accounting system and standards which the entity applies; The completeness and appropriateness of disclosures related to fair values under the accounting system and standards which the entity applies; and
213
d) Whether subsequent events require adjustment to the fair value measurements and disclosures included in the financial statements. Communication with Those Charged with Governance
65. The auditor and the audit firm should communicate audit matters of governance interest with those charged with governance. Because of the uncertainties often involved with some fair value measurements, the potential effect on the financial statements of any significant risks may be of governance interest. For example, the auditor and the audit firm consider communicating the nature of significant assumptions used in fair value measurements, the degree of subjectivity involved in the development of the assumptions, and the relative materiality of the items being measured at fair value to the financial statements as a whole.
214

VN Standards on Auditing: Laws & Regs

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

VN Standards on Auditing: Laws & Regs

Uploaded by

Copyright:

Available Formats

Vietnam Standards on Auditing

Quality control of auditing activities

Standard No 310 Understanding of business situation

Standard No 310 Understanding of business situation

Standard No 310 Understanding of business situation

Standard No 310 Understanding of business situation

Standard No 310 Understanding of business situation

Standard No 310 Understanding of business situation

Standard No 500- Auditing evidences

Standard No 500- Auditing evidences

Standard No 500- Auditing evidences

Standard No 500- Auditing evidences

Standard No 510- First years auditing- Fiscal year- Starts balance

Standard No 510- First years auditing- Fiscal year- Starts balance

Standard No 510- First years auditing- Fiscal year- Starts balance

Standard No 520- Analytical process

Standard No 520- Analytical process

Standard No 520- Analytical process

Standard No 520- Analytical process

Standard No 580- Directors expositions

Standard No 580- Directors expositions

Standard No 580- Directors expositions

Standard No 240- Fraud and error

CONTENTS OF THE VSA Responsibility of the Director (or leader)

Standard No 240- Fraud and error

Standard No 240- Fraud and error

Standard No 240- Fraud and error

Standard No 240- Fraud and error

Standard No 300- Planning

Standard No 300- Planning

Standard No 300- Planning

Standard No 300- Planning

Standard No 300- Planning

Standard No 300- Planning

Standard No 300- Planning

- General classification of client Very important Important - Other: Not important

Standard No 300- Planning

Standard No 300- Planning

Standard No 300- Planning

Standard No 300- Planning

Standard No 400- Risk assessments and internal control

Standard No 400- Risk assessments and internal control

Standard No 400- Risk assessments and internal control

Standard No 400- Risk assessments and internal control

Standard No 400- Risk assessments and internal control

Standard No 400- Risk assessments and internal control

Standard No 400- Risk assessments and internal control

Standard No 400- Risk assessments and internal control

Auditors High assessment of Medium inherent risk Low

Standard No 530- Audit sampling and other selective testing procedures

Standard No 530- Audit sampling and other selective testing procedures

Standard No 530- Audit sampling and other selective testing procedures

Standard No 530- Audit sampling and other selective testing procedures

Standard No 530- Audit sampling and other selective testing procedures

Standard No 530- Audit sampling and other selective testing procedures

Standard No 530- Audit sampling and other selective testing procedures

Standard No 530- Audit sampling and other selective testing procedures

Standard No 530- Audit sampling and other selective testing procedures

Standard No 530- Audit sampling and other selective testing procedures

Standard No 530- Audit sampling and other selective testing procedures

Standard No 540- Audit of accounting estimates

Standard No 540- Audit of accounting estimates